Abbey ready to accept £8.6bn bid from Spain's biggest bank

Board backs cash and paper offer - Deal will create eighth-largest global bank

Abbey National is expected this morning to accept a formal bid from Spain's biggest bank, Santander Central Hispano, to buy the British mortgage lender for up to an estimated £8.6bn.

The deal will bring down the curtain on 15 years on the stock market for the former building society, which demutualised in 1989 and still has 1.7 million small shareholders. It will be the first significant acquisition of a UK bank by a European rival.

Abbey's board, which was locked in a meeting last night to consider the offer, is expected to urge shareholders this morning to accept a cash and paper offer worth between 550p and 580p a share.

Abbey shares soared to the top end of that price range on Friday evening after Britain's sixth biggest bank announced it had received an approach.

The senior management of both Abbey and Santander are expected to move quickly to try to persuade British investors of the merits of the deal, which is at a significant premium to the "fair value" price of 450p to 470p which most analysts attach to Abbey. The pair will be keen to head off possible counter-bids from rivals, which could include Citigroup of the US or a UK bank.

The board of Santander met in Madrid yesterday afternoon to give their seal of approval to the bid, details of which were then passed to Abbey for formal approval. Both sides were hoping to announce the details to shareholders at 7am this morning, with presentations to investors, City analysts and the press throughout today.

The Santander offer will be mostly in shares, but will include a cash element. Private shareholders are likely to be able to use a share dealing service, either through Abbey's 741-branch network, or through a specially set up telephone service, to sell their Spanish shares.

Santander, chaired by Emilio Botin, the head of one of Spain's most powerful families, is the No 1 player in Latin America as well as Spain. The Abbey deal will make it one of the world's 10 biggest banks, fulfilling one of Mr Botin's most cherished ambitions.

It is possible that some of Abbey's senior management could remain in place in the longer term as Santander has established a pattern of giving considerable autonomy to local management. Under the terms of the deal, which have been concluded amicably, Luqman Arnold, Abbey's chief executive, and the bank's finance director, Stephen Hester, would stay on for a period of time to oversee Britain's first major cross-border merger. Abbey branches are likely to retain the name, which has only recently been shortened with the dropping of the word National to create a more informal atmosphere.

Unlike some of the major tie-ups that have happened between UK banks, Santander and Abbey have no overlap in customer bases or areas of operation, which will mean the Spanish bank is unlikely to slash Abbey's branch network or employees to gain financial benefits from the deal.

However, there will be some cost-cutting. Santander's chief executive, Alfredo Saenz, said earlier this year when his bank's interest in Abbey leaked into the public arena that he thought he could squeeze out £500m in annual savings from Abbey by transferring its IT system on to the cutting-edge one used by the Spanish bank.

Even though Abbey was preparing last night to recommend Santander's offer, the deal could still unravel. News of the talks caused jitters on Friday when it was confirmed to the market, and the Spanish bank's shares dropped 5 per cent before they were suspended. If they take another hammering when they start trading again this morning, its own shareholders, as well as Abbey's, could be unenthusiastic about the mainly paper deal.