Spain's biggest bank Banco Santander today said it would acqire beleaguered British mortgage lender Alliance & Leicester in a deal  valuead at £1.26 billion ($2.6 billion / Rs10,720 crore) that should reduce funding pressures on the UK bank and help strengthen Santander's existing Abbey business. This deal materialised after the Spanish giant had refused to pay a higher price and walked away from negotiations.

Alliance & Leicester (A&L) rose as much as 54 per cent, the most since the company went public in 1997, after Santander said it will provide £1 billion of capital in the takeover of the Leicester, England-based bank.

Santander rose 0.7 percent to €11.31 in Madrid, giving the bank a market value of €70.2 billion ($111 billion), the second largest in Europe after London-based HSBC Holdings Plc.

The Spanish group said it's offering one of its own shares for every three shares of A&L. That values the offer at 299 pence, or a 36.4 per cent premium to Friday's closing price. The all-stock offer of 299 pence a share amounts to 317 pence, or £1.33 billion, including the half-year dividend, Santander said in a statement.

This acquisition continues a string of similar deals undertaken by Santander chairman Emilio Botin since he took office in 1985. It was recently in the news for successfully completing the world's biggest banking acquisition of ABN-Amro, in cooperation with Royal Bank of Scotland and Fortis, in 2007. (See: Royal Bank of Scotland- Fortis- Santander consortium acquires ABN Amro in world's biggest banking takeover)

It has also considerably juggled its European portfolio by swapping $1.6 billion of assets with the finance arm of American conglomerate General Electric last month. (See: GE Commercial Finance and Spain's Banco Santander to swap $1.6 billion of assets)

The bank's British assets include the country's second-biggest mortgage lender Abbey National, acquired in 2004 for £9.2 billion. Since then, the mortgage business has plummeted in value in the wake of the worst housing market in more than 15 years. Consequently, Santander plans to combine the two operations to strengthen its balance sheet.

 By combining the business with Abbey, its existing UK arm, Santander said it would be able to cut costs by £180 million a year by 2011. It will also speed up the Spanish group's push to attract small and medium business customers. It's also planning to reduce the combined assets of A&L and Abbey by £20 billion to £30 billion over the next couple of years.

"A&L's shareholders, customers, employees and other stakeholders will also gain from the benefits of being part of a larger, more diversified banking group," the pair said in a statement.

"In particular, being part of the enlarged Santander group should, over time, enable A&L's cost of funding to be reduced," they added.

Credit Auricles SA, France's biggest bank, dropped a bid two years ago to buy Alliance & Leicester when its market value was 5.2 billion pounds. Botin said on 7 February that Santander wouldn't bid for Alliance & Leicester after looking at its books earlier this year. The price Santander offered today in the 3-for-1 stock swap is 46 per cent below UK lender's price of 588 pence on 7 February.

"A&L is a strong and attractive business and its resilient performance is proof of the quality of its franchise. However, the board is acutely aware of the significant external risks presented by the deterioration in economic conditions and the continuing turbulence in the financial markets," said Roy Brown, the UK bank's acting chairman.

The acquisition of Alliance and Leicester, with more than 5.5 million customers and 254 branches in the UK, will produce a return on investment of about 19 per cent by 2011, Santander said. The deal will add to earnings from 2009, it said.