Investors Say Santander's Brazil Buyback Comes as Unit Set for Turnaround
Investors Say Offer Will Act as Red Flag for Future IPOs
MADRID—Two of the largest shareholders in the Brazilian unit of Banco Santander SA SAN.MC -2.09% say the Spanish lender's offer to buy back the 25% stake it doesn't own puts pressure on them to take a loss just as they believe the unit's declining share value is set to rebound.
Santander's surprise offer, these minority shareholders say, is a red flag for potential investors in its future initial public offerings, including one planned for its U.K. subsidiary. The offer goes against the bank's stated strategy of taking, and keeping, its units public, they say.
Executives at Tweedy, Browne Co. LLC and Brandes Investment Partners L.P. say they haven't decided whether to sell their shares in Banco Santander Brasil SA, SANB11.BR -0.60% which were priced at 23.50 Brazilian reais ($10.60) when Santander took the unit public in 2009. The U.S. investment firms are the third- and fourth-largest holders of shares in the unit, according to the most recent data from Morningstar, MORN -2.04% Inc. Together they own 104 million shares, 2.74% of the total.
While Santander executives say the buyback deal will slightly boost the bank's overall earnings, the investors face a dilemma: Sell to Santander now at the bank's offered price of 15.31 reais per share, or risk holding a very small proportion of the unit's publicly traded shares if other shareholders accept the buyback offer.
The fewer the shares traded in a market, the less liquid-or harder to sell-they usually are.
"We are left with a decision of whether to play Russian roulette," said William H. Browne, a managing director at Tweedy, Browne, which is based in Stamford, Conn.
"Any investor interested in making an investment in a future flotation of a Santander subsidiary should look very carefully at the parent's record with regard to their treatment of minority shareholders," he added. "I think there is a reasonable chance if it's in their financial interest, they'll run right over your financial interests despite what they might say to the contrary."
Santander's Chief Financial Officer José Antonio Álvarez said in an interview that the offer is "a significant premium that the minorities can take or not take, while at the same time being profitable for Santander shareholders."
Santander is offering to swap shares in the Brazil unit for a portion of shares in the parent company. That trade would price the Brazil unit shares 20% above the share's closing price on the day before the offer was announced. The bank has said it expects to maintain the offer until October.
Mr. Álvarez met in London this week with Santander shareholders, including those with a stake in the Brazil unit.
When the offer was announced on April 28, Santander Chief Executive Javier Marín said the bank's strategy to have its subsidiaries publicly traded "doesn't change at all."
But in Brazil, he said "the market doesn't believe in our franchise and we do, and that's why we're carrying out this transaction."
Shares in the Brazilian unit have declined around 40% between the day it went public and the day before the tender offer. During the same period shares of Brazilian rivals Banco Bradesco SA BBDC4.BR -0.91% and Itaú Unibanco Holdings SA have gained.
Tito Labarta, a bank analyst at Deutsche Bank AG DBK.XE -1.31% , said in an April 29 research note that Santander's buyback offer "more than offsets another relatively weak quarter in Brazil." He added: "We think it makes sense to tender the shares, as liquidity after the offering is likely to be very limited."
Some investors might pause knowing that Santander, a bank known for shrewd deals, is interested in buying back the shares, said Rui Croca, a bank analyst with rating firm DBRS Inc. "I think the shareholders might be thinking, 'If Santander is buying, they might be buying it for a reason. Why should we let Santander get the upside?'" Mr. Croca said.
Executives at Tweedy Browne and Brandes said they believe the Santander unit will become more profitable.
"We recognize the near term outlook is challenging, but we think long-term and we believe that Santander Brasil has attractive longer-term prospects," said Michael Hutchens, director of investments at Brandes, which is based in San Diego. "Unfortunately, tendering shareholders will only receive a portion of the future benefits of these attractive prospects as holders of Santander Group shares."
Thomas H. Shrager, a managing director at Tweedy, Browne, said Santander Brasil sharpened its loan-underwriting standards several years ago. As the older loans start to mature, those newer loans, with fewer defaults, will start to boost the bank's profits, he said.
"So in about one year, the bank will be worth more than it is now, but Santander is offering to buy us out at the absolute bottom," Mr. Shrager said.
Tweedy, Browne executives also say they are concerned that if they remain investors in Santander Brasil, their shares will trade on a section of the São Paulo stock exchange that has less strict corporate governance standards.
The unit's shares are now listed on Level 2 of the exchange, a section that sets higher governance standards than the traditional market does. Level 2 places limits on board members' tenures, for instance. If a small portion of shareholders accept Santander's buyback offer, the percentage of Santander Brasil's publicly traded shares would fall below 25% of the total and the bank would be required to move to the traditional market.
"We're not going to change our standards of governance," Santander's Mr. Álvarez said.
The top shareholder after Santander, Qatar Holding LLC, owns 5.17% of Santander Brasil. Representatives for Qatar Holding, an arm of the Gulf emirate's main sovereign-wealth fund, didn't respond to requests for comment.
Shareholders shouldn't be completely caught off guard by Santander's move, some analysts say.
"Some investors have raised the point that there may be a reputational cost for the Santander Group of buying out subsidiaries below previous IPO prices," Iñigo Vega, an analyst with Nau Securities Ltd. in London wrote in a May 2 research note.
This risk is "nothing new," he wrote. Investors should "already be discounting such behavior."
Santander has done this before, he recalled.
In December 2012 it offered to buy the 10.26% stake in Banco Español de Crédito SA that it didn't own for "well below IPO pricing level," Mr. Vega wrote. Still, he added, Santander had no trouble in January this year drumming up strong demand for the IPO of its U.S. auto-lending unit.
