Citigroup takes on Santander with £8.5bn offer for Abbey

Citigroup, the US banking giant, is preparing to challenge Banco Santander Central Hispano with an £8.5bn bid for Abbey National.

Citigroup, the US banking giant, is preparing to challenge Banco Santander Central Hispano with an £8.5bn bid for Abbey National.

Santander's board is to meet in Madrid today to decide whether to proceed with an agreed offer for Abbey.

It is understood that Luqman Arnold and Stephen Hester, Abbey's chief executive and finance director, have indicated that they would be willing to recommend a bid at less than the 580p price at which Abbey shares closed on Friday. Santander is expected to offer in the region of 525p a share, valuing Abbey at £7.7bn.

This would leave the way open for Sandy Weill, Citigroup's chairman, to step in to make a rival offer.

Mr Weill has asked bankers at the group's investment banking subsidiary to work on a bid for Abbey. Citigroup is keen to build a banking base in the UK and, having failed to make much ground through organic growth, is now prepared to execute an acquisition.

Citigroup is understood to have looked at a bid for Lloyds TSB but been put off by the potential £25bn price tag and the continuing liabilities arising from the bank's life assurance business, Scottish Widows.

"It is much easier to justify a £10bn foray into uncharted waters to Citigroup's shareholders than a £25bn one," said a senior banker.

Citigroup has been monitoring the Abbey situation since it was rumoured that the bank was in talks with Santander two months ago.

At the time, neither party was willing to comment on talks. However, the announcement earlier this month that Abbey had capped the liabilities in its life assurance business and would not have to inject any more funds into the operation alerted potential bidders.

This drew a veil over an 18 month-long restructuring masterminded by Mr Arnold and Mr Hester, which has seen Abbey write off nearly £3bn.

Abbey shares shot up 87p to 580p on Friday after it revealed that it was in bid talks. Santander later admitted that it was the suitor after its shares fell on the Madrid stock market.

Though the City is hoping for a bid of as much as 600p a share, sources close to Abbey were tying to dampen down the more fevered speculation.

"The City analysts had a target price for the bank of 485p a few weeks ago and this was brought down to under 430p after Luqman's recent statement about difficult market conditions, which was seen as a profits warning," said a well- placed source.

"Even those fair values had a certain amount of a bid premium in them."

Other bidders have been mentioned. Two years ago, Abbey was in talks with National Australia Bank, owner of the Clydesdale and Yorkshire banks, about a possible merger. But NAB's problems at home, where it has run up massive trading losses and had to replace its chief executive, have ruled it out.

Abbey is due to report half- year results on Wednesday, but is likely to bring them forward to Monday to try to calm the market. The figures will show a return to profitability after the £686m loss made last year.