Sovereign $700 million overnight convertible preferred talked at 3.875-4.375%, up 35-40%

Nashville, Feb. 18 - Sovereign Bancorp Inc. launched $700 million of 30-year convertible preferreds talked to yield of 3.875% to 4.375% with a 35% to 40% initial conversion premium. Lehman Brothers is sole bookrunner of the overnight transaction.

Par is $50 for the issue. It will be non-callable for three years then with a 130% hurdle thereafter.

There also is a 130% contingent conversion trigger and a contingent interest trigger of 130%.

Holders will have full dividend protection.

There is a $100 million greenshoe available.

Sovereign is in the process of acquiring First Essex Bancorp Inc. and announced that as a result of its consent solicitation for First Essex common stock it will issue 12.69 million shares of common stock and pay $208.2 million to First Essex shareholders.

The acquisition adds 11 full-service banking offices in northern Massachusetts, nine full-service banking offices in southern New Hampshire plus $1.7 billion in assets and $1.3 billion in deposits to Sovereign's franchise.

Sovereign, however, is considered a prime takeover target of Royal Bank of Scotland, according to market buzz earlier this month. The chatter goes back to last summer, which has fueled a sharp rise in Sovereign's share price.

Sovereign's 8.75% convertible trust preferred also has risen in tandem with the stock.

On Wednesday, Sovereign shares closed off 3 cents to $22.72 but in after hours trading dropped 91 cents, or 4%, due to the convertible offering. The 8.75% convertible ended off 0.15, or 0.5%, to 27.51.

In January, Moody's raised the long-term debt ratings of Sovereign, including the convertible preferreds to Ba1 from Ba2, citing balance sheet improvement, including lower debt used to support investments in subsidiaries - or double leverage - and a more prudent liquidity profile.

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