Page last updated at 17:32 GMT, Tuesday, 19 August 2008 18:32 UK

Warning from Alliance & Leicester

Alliance & Leicester branch
The bank warns its future may be in doubt if the takeover is not supported

The Alliance & Leicester (A&L) bank has warned of "significant external risks" to itself if Banco Santander's planned takeover is rejected by shareholders.

More than 560,000 A&L shareholders are being urged in a letter to support the 1.3bn takeover, announced in July.

Roy Brown, the bank's acting chairman, said if the deal did not go through then the bank would be exposed to the worsening economic slowdown.

Investors are being offered one Santander share for three A&L shares.

If the deal takes place as planned this October, then A&L will be merged with Banco Santander's existing UK subsidiary, the Abbey.

This will create a much larger bank with 959 branches and 10% of the UK's bank current accounts.

In a document outlining the terms of the deal to shareholders, Mr Brown emphasised the risks involved in the deal not happening.

"There remain significant external risks presented by the deterioration in the broader economic outlook and the continuing turbulence in financial markets," he said.

"The A&L Board sees no obvious circumstances that are likely, materially, to improve conditions in the financial markets or the broader economic outlook in the near to medium term."

Need for shelter

The Abbey was bought by Santander, Spain's biggest bank, in 2004.

A&L and its suitor require a 75% vote in favour of the deal by A&L's shareholders by the deadline of Sunday 14 September.

The offer values each A&L share at 317 pence each, as of 8 August, in turn valuing the bank at 1.333bn.

Including an impending interim dividend, worth 18p per share, the deal represents a 53% premium to A&L's stock market value just before the takeover was announced in July.

The A&L Board is... acutely aware of the significant external risks presented to A&L
A&L statement

The need for A&L to shelter under Santander's wing is highlighted by figures in the 260-page document outlining the rationale for the deal.

First revealed at the start of August, they show that in the first six months of this year, profits at A&L evaporated almost completely, falling from 290m in the first half of 2007 to just 2m this year.

The bank goes out of its way to warn that it is "acutely aware" that its financial position may become even weaker because of the credit crunch.

Further shocks?

And it hints strongly that, on its own, its finances might be weakened further.

"The A&L Board also recognises the risk that further shocks to the financial system created by unfavourable developments at other financial institutions could generate widespread general adverse sentiment towards financial groups like A&L," the bank said.

"The A&L Board has concluded therefore that there is a risk of external events further eroding shareholder value and that the value to A&L shareholders of the greater certainty provided by being part of a larger organisation is considerable," it added.

To make sure that A&L's finances do not become even worse, Santander says it is prepared to inject, if necessary, up to 1bn in extra cash to cover any further losses on loans and investments.

To win over staff, every A&L employee is being offered 100 free shares in Banco Santander if the takeover goes through.

The Spanish bank expects that merging the A&L with the Abbey will save about 180m a year in running costs.

Santander says staff cuts are likely among the combined bank's workforce but an A&L spokeswoman said there had been no discussion about the scale of redundancies among its 7,300 staff.

Shares in A&L ended 15p or 4% lower at to 319.5p.



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