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Santander Plans to Take Over Banesto Unit

Spain's Banco Santander SA SAN.MC +1.48% said Monday it would fully take over its publicly traded affiliate Banco Español de Crédito SA, BTO.MC +1.09% or Banesto, in a deal that will result in the closure of about 700 branches and underscores the gathering pace of restructuring in the country's stricken banking sector.

Santander, Spain's largest bank by market value, will buy the 10.26% of Banesto it doesn't already own in an all-stock deal for the equivalent of €3.73 ($4.91) a share. It expects the deal, which is valued about €263 million, to close in May.

As part of the deal, Santander will replace the Banesto brand with its own. It will also eliminate its own Banif private-banking brand, replacing it with the Santander brand.

The deal comes as Spain's banking sector undergoes a broad restructuring following the collapse of a decadelong housing bubble and a dramatic spike in bad loans, now nearly 11% of the total outstanding. The sector is concentrating into fewer banks, with larger, healthier banks absorbing weaker ones, often with help from the government.

As part of a nearly €40 billion European bailout for Spain's financial sector, nationalized banks will have to close thousands of bank branches and lay off thousands of employees.

Bankia SA, BKIA.MC -0.29% the largest of the bailed-out lenders, said last month it would cut its staff by more than 6,000, close more than 1,000 branches and halt real-estate lending.

Following the Banesto deal, Santander—which isn't one of the bailed out banks—said Monday that it would close about 700 of the more than 4,600 bank branches that it, Banesto and Banif have in Spain. Santander also said it would slowly reduce its staff in Spain, but declined to specify the number of employees affected. As of September, Banesto had 1,698 bank branches across the country. Santander had 2,912 branches, and Banif had 52 branches.

Still, Santander estimated its share of bank branches in the country would grow to 13% by 2015 from 10% in 2008 as other lenders close even more banking outposts. By 2015, it projected Spain's banking network would decline about 35%, to around 30,000 branches, compared with 2008.

Santander's purchase of the remaining Banesto stake is a logical response to the deep economic crisis afflicting Spain, said Robert Tornabell, a banking professor at the ESADE Business School.

"Spain is a country with too many branches, too many [banking] employees. There's an oversupply of banking services," he said. "In five years we'll see in Spain five or six stronger, bigger Spanish banks."

Still, he said that as a result of the consolidation, Spanish consumers could face higher banking fees and loan costs.

For Santander, the Banesto deal marks a reversal. As recently as July, the bank's management said it wouldn't buy the remaining Banesto stake and in April, Chief Executive Alfredo Sáenz said cost savings from the deal might not be enough to make it worthwhile.

On Monday, the company said fully absorbing Banesto would save €420 million annually—in part because of branch closures and the integration of back office activities— and increase annual revenue by €100 million by the third year. Santander also said the deal would improve profitability, helping to increase profit per share 3% in the third year.

José Antonio Álvarez, Santander's chief financial officer, said that fully taking over Banesto now makes sense because Spain faces low economic growth and increasing concentration in the banking sector.

"We studied a lot of alternatives. This was the one clearly best suited for the current circumstances," he said.

Santander took control of Banesto, at one time Spain's largest bank, in the early 1990s after the government nationalized it amid a banking scandal.

Some analysts said replacing the private-banking Banif brand with the Santander name made sense after the bank had to compensate Banif clients for losses related to the failure of Lehman Brothers Holdings Inc. in 2008. "The [Banif] brand has lost a lot of luster in recent years," said Carlos Peixoto, an analyst with BPI, even as Santander's brand has remained strong.