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An ETF Play on the Santander IPO

Spanish banking behemoth Santander (STD) sold part of its Brazilian operations in the largest IPO in America since Visa (V - Get Report) and the largest ever in Brazil.

Santander's Brazil unit is the third-largest private bank in Brazil, with about 10% market share, and delivered about 18% of profit in the first six months of this year.

The bank plans to sell about 16% of the company for about $7 billion, giving the unit a total value of about $45 billion, close to one-third the value of Santander. It shows that investors are willing to pay 50% more for this unit than the parent, as it accounts for only 18% of profit, and the unit is also priced about 10% above the price-to-earnings multiples on competitor banks.

I think that while the IPO may be a little overpriced, the Brazilian unit is a much better bet than the Spanish assets. As I wrote on RealMoney, Spain has a housing bubble that has yet to truly pop.

Unemployment, manufacturing and retail data, along with the banking industry's continued use of low interest rate mortgages, leaves the unacceptably high risk for investors in an ETF such as iShares Spain (EWP), which counts Santander as its No. 1 holding at 23.18% of assets.

Longer term, it's also unclear what will happen with the Brazilian unit. A holder of EWP, which tracks the MSCI Spain Index, can participate in gains from the remaining 84% of the unit held by STD, but should the bank decide to sell it or spin it off to shareholders, EWP holders would lose that exposure going forward because it will not be included in the index.

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