(Reuters) - Spain's No. 5 retail bank Banco Popular launched an all-share bid for its smaller rival Banco Pastor on Friday, proposing a merger that would give the two poorly capitalised banks a chance to cut costs and pool resources.
Popular offered 1.115 new shares for each Pastor share, and said the deal was subject to approval from a majority of Pastor shareholders.
A source close to negotiations told Reuters that Popular has a commitment from shareholders with some 50.1 percent of Pastor capital to take up the offer.
"The proposal to buy Pastor was announced after ensuring that, in principal, both Pastor's chairman and its core shareholders would take up the offer," the source said.
Neither Pastor nor Popular confirmed, however, that the deal has received the green light from Pastor chairman Jose Maria Arias Mosquera or from other core shareholders, Spanish retailer Inditex founder Amancio Ortega and Spanish savings bank Novacaixagalicia, each with 5 percent.
The deal implies a premium of about a third, valuing Pastor at about 1 billion euros compared with its market capitalisation of some 826 million euros.
After the capital hike to issue new shares, the premium would be 16 percent, Bankia analyst Javier Bernat said.
The Spanish stock market regulator had suspended trading in both shares earlier on Friday, sparking speculation of a merger.
Spanish banks are under pressure to close offices and sack staff as they grapple with falling profit, closed money markets and demands for increased provisioning against rotten real estate assets.
Pastor failed Europe-wide bank stress tests in July, which measured how banks will fare in a deep economic crisis including sovereign debt defaults. Popular passed, but by such a low margin that it must boost capital.
The Spanish banking sector is in the midst of restructuring, as the government forced on it a wave of mergers between unlisted savings banks, and recapitalisation.
"The deal makes all the sense in the world because Popular is very efficient and Banco Pastor has liquidity problems," said Jose Carlo Diez, chief economist at Intermoney Valores.
The Spanish merger comes as German and French leaders meet to decide how to strengthen European banks shaken by exposure to Greek debt, which hovers on the brink of default. But Spanish banks' exposure to Greek bonds is relatively small.
CONSOLIDATION
A tie-up would be the second merger between listed Spanish banks since the nation's economy took a dive following the bursting of a housing bubble in 2008. Mid-sized bank Sabadell took over smaller peer Guipuzcoano in September 2010.
"It was time that we had an acquisition on a bigger scale amongst the private banks, given how important the recapitalisation process is for the Spanish financial sector for the future," said Santiago Carbo Valverde, economics professor at Granada University.
Popular's total assets at the end of 2010 were 130 billion euros, making it Spain's No. 5 bank by assets. Its market capitalisation is almost 5 billion euros.
Pastor's total assets at the end of last year were 31 billion euros. It is one of Spain's smaller listed banks.
Popular's Tier 1 capital ratio in the European bank stress test in July was 5.3 percent, against 3.3 percent at Pastor.
Both banks had been rumoured to be looking at savings banks as possible purchases. Government-driven consolidation reduced the number of these unlisted, regional banks to 15 from 45 last year.
"Buying Pastor is a much better deal for Popular than one of the savings banks. Pastor has been on the market for some time and (Barcelona-based) rival Caixabank was really interested in getting its hands on it," a source close to the deal said.
None of the savings banks, known as cajas, managed to seal deals with private equity firms this year, and the Bank of Spain took over three last week, valuing them at practically zero.
Pastor's home base is Galicia, north-west Spain, where it controls 20 percent of the market. Like Popular, it focuses on loans to small and medium-sized businesses.
Apart from operational synergies, Popular's swoop on Galicia is also strategically sound because of the proximity to Portugal, where it has a growing banking business, Bankia analyst Javier Bernat said.
Spain's banks will face a massive spike in funding needs next year - around 130 billion euros ($174 billion) of Spanish bank debt will come to maturity in 2012, according to Thomson Reuters figures.