Santander has agreed to acquire Banco Popular for ‘a notional consideration of €1’ after the European Central Bank determined the embattled lender was ‘failing or likely to fail’. The Spanish finance giant will complete a €7 billion rights issue to take on Popular’s debt and bolster its balance sheet. Santander also expects the deal to create cost synergies of close to €500 million per year from 2020.

The forced sale to Santander has come after shares in Popular slumped more than 50% in the last week over concerns about its capital position. The loss-making bank, stung by non-performing property loans left over from Spain’s financial crisis, booked a first-quarter loss of €137 million last month and has been trying to raise cash in recent weeks by reportedly looking to offload its stake in credit card company Wizink as well as its US subsidiary TotalBank.

The deal also marks the first test of the ECB’s new rules on failing banks, designed to avoid taxpayer-funded bailouts and instead leave existing shareholders and creditors bearing the brunt of the losses. Popular’s dramatic fall and the new regulations being enforced suggest that mid-tier lenders could come under increasing pressure to address liabilities from stakeholders who will be on the hook should they fail.

The ECB’s new rules could, in turn, lead to more consolidation in the banking sector, and completed deals for commercial banks in Europe broke 60 last year for the first time since 2011, per the PitchBook Platform. And this year’s biggest deal so far—Banca Popolare’s tie-up with BPM—is another indicator of the path that vulnerable medium-sized banks may have to tread.

Completed deals for European commercial banks

Santander

Popular’s loan book and the underlying value of some of its assets provide Santander with something of a sweetener on the forced deal. Indeed, Popular currently lends more money to SMEs in Spain than Santander does and, by combining both banks’ SME loan books, Santander’s acquisition of Popular creates a single player with a market share representing roughly 25% of that lucrative market and almost 18% of all lending in Portugal.

Article by Eric Burg, PitchBook