BANCO SANTANDER yesterday agreed a £1.26 billion (€1.57 billion) deal to buy the UK's Alliance Leicester (AL), extending the reach of the Spanish bank in the UK market.

Santander, which late last year abandoned initial discussions with AL over price, is offering one share for three AL shares.

The deal is priced at 299p a share, putting a value of £1.26 billion on the UK bank. Santander said its offer represented a 36.4 per cent premium to AL's closing share price on Friday.

The Spanish bank will issue 140 million new shares to pay for the deal, which is structured as a scheme of arrangement and conditional on getting approval from 75 per cent of AL shareholders.

AL shares rose 115.75p to close at 335p in London, suggesting that investors are holding out hopes that a counter-bidder may emerge.

Shares in Santander were almost unchanged, closing at €11.24 in Madrid.

Santander plans to combine AL with Abbey, the fourth-largest bank in the UK, which it acquired in 2004.

It said the deal would give the combined business 959 branches, representing a 7.6 per cent share of the UK market.

AL and Abbey would have a combined market share of more than 8 per cent in UK savings and unsecured personal loans.

In addition, Santander said it intended to reduce the assets of the combined AL and Abbey by between £20 billion and £30 billion over two years.

The Spanish bank added that it "believes that it is consistent with its existing policies to assume that it will need to provide additional capital of £1 billion to AL". A deal with AL would further Santander's ambitions to grow its branch network in the UK, while also providing a platform to make a push into business banking, which Santander has identified as a new revenue stream.

Emilio Botín, Santander chairman, said: "The acquisition of AL will be a significant step in the development of Santander's UK business."

Only last week AL named a new chairman, appointing Alan Gillespie to the role left vacant by the death of Sir Derek Higgs in April.

Mr Gillespie plans to take up his new role on September 8th. The appointment of Mr Gillespie was widely regarded as a move to help stabilise the bank amid fears that it could face further pain from the credit crunch. - ( Financial Times service)