Cautious backing for £8bn Abbey bid

Possibility of a counter-bid is not being ruled out - Abbey chief executive to make £3.3m on options

Abbey National received a cautious welcome from shareholders yesterday to its proposed plan to sell itself to Spain's largest bank, Santander Central Hispano, in a mainly shares deal which valued the British bank at £8bn last night.

Abbey National received a cautious welcome from shareholders yesterday to its proposed plan to sell itself to Spain's largest bank, Santander Central Hispano, in a mainly shares deal which valued the British bank at £8bn last night.

The stock of both banks fell during the day as investors signalled they still had some concerns about the high paper element of the deal, plus the transactional risks involved in pulling off Europe's first major cross-border bank merger.

Under the terms of the deal, which will create the fourth biggest bank in the region and one of the top 10 in the world, Santander is offering one of its own shares, plus 25p in cash, for every share in Abbey. It will also pay shareholders an extra 6p to make up for the extra dividend they would have received from Abbey.

After Santander's shares fell 3 per cent yesterday, the value of its offer stood at 542p a share when the special dividend is stripped out.

Abbey's shares also dropped by 4 per cent to 557p, reflecting nerves in the market about receiving paper in the Spanish bank. The consequences of the deal on the leadership of Abbey also began to be felt as Stephen Hester, Abbey's finance director, announced he would be leaving to become chief executive of British Land.

Luqman Arnold, Abbey's chief executive, will stay on for up to a year to oversee the integration of Abbey. Mr Arnold, who has found a buyer for Abbey 17 months into the three-year turnaround programme he initiated when he joined the bank in November 2002, will receive up to £3.3m in profit on share options which crystallise as a result of the deal.

Mr Arnold has also made a £350,000 profit by investing £1.7m of his own money in Abbey's shares. He admitted Abbey had been approached by other banks, but added the bank had decided to engage in talks with Santander because it had mounted a "very serious and very determined" approach.

However, the possibility that Santander's offer, which has been in the offing for several months, could trigger a rival approach could not be ruled out, despite the fact that the deal announced yesterday includes an £87m break fee. Royal Bank of Scotland, Lloyds TSB and Barclays would all like to be able to snap up Abbey, although they would face certain referral to the Competition Commission.

James Leal, an analyst at Teather & Greenwood, said of the Santander bid: "At the headline level, this is still a good price. But the small cash element means investors will be swapping something they know - a retail bank in the UK - for exposure to Spain and Latin America, which they probably do not know."

In a day of intensive presentations to the City by its senior team, Santander, which currently has no exposure to the UK, said it could squeeze annual synergies of €560m (£370m) out of Abbey by 2007, including cutting costs and boosting revenues. That will involve revamping Abbey's core retail banking strategy and moving the bank on to Santander's cutting-edge IT platform, which will allow it to strip out swathes of Abbey's back office and processing functions.

Emilio Botin, the chairman of Santander, who has overseen the rapid expansion of the Spanish bank into the dominant player in his own country and Latin America, said buying Abbey and gaining access to its 18 million customers was a "once in a lifetime opportunity".

Alfredo Saenz, Santander's chief executive, said the group was keen to gain a foothold in Britain's banking market. "The pool of profits in the UK are three times that of French banks, and seven times German banks. That gives us an idea of the opportunity and potential rewards ahead of us," Mr Saenz said.

Santander is almost certain to take the knife to Abbey's 25,000 workforce. There is also a possibility that Santander will sell off Abbey's life insurance businesses, Scottish Mutual and Scottish Provident, which are based in Scotland.