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UPDATE: Santander acquires Banco Popular, to launch €7B capital increase

Banco Santander SA is acquiring Banco Popular Español SA's entire share capital for €1 and will carry out a capital increase of about €7 billion to cover the capital and provisions required to boost the troubled lender's balance sheet.

The deal is a result of a competitive sale process organized in the framework of a resolution scheme adopted by the EU's Single Resolution Board and executed by Spanish bank restructuring fund FROB, Santander said June 7. The deal comes after the ECB concluded that Banco Popular was "failing or likely to fail."

"The significant deterioration of the liquidity situation of the bank in recent days led to a determination that the entity would have, in the near future, been unable to pay its debts or other liabilities as they fell due," the ECB said.

As part of the execution of the resolution scheme, all of Banco Popular's outstanding shares at market close June 6 and all shares resulting from the conversion of its issued Additional Tier 1 capital instruments have been cancelled. In addition, all regulatory Tier 2 capital instruments issued by Banco Popular have been converted into newly issued shares, all of which have been acquired by Santander for €1.

The acquisition is expected to have a neutral impact on Santander's group common equity Tier 1 capital ratio and generate a return on investment of 13% to 14% in 2020 and an increase in EPS in 2019, Santander said. The bank will book additional provisions of €7.9 billion to cover Banco Popular's nonperforming assets, including €7.2 billion for real estate.

The combination of the banks will create Spain's largest bank by both lending and deposits, serving more than 17 million clients with a credit market share of around 20%. The combined business, which will operate under the Santander brand, will have a 25% market share in lending to small and medium-sized enterprises in Spain.

In Portugal, Banco Popular Portugal SA will be integrated into Santander Totta SGPS SA, creating a combined bank serving more than 4 million customers.

The combined entity will be led by the current management team of Santander Spain with Rami Aboukhair as CEO. Current Santander CFO José García Cantera will serve as chairman of a new board for Banco Popular, Reuters reported June 7.

Santander shareholders will have preferential subscription rights in the planned €7 billion capital increase.