Abbey and Alliance & Leicester (A&L) agreed a £1.3 billion deal yesterday that will change the face of high-street banking, leap-frogging rivals to become Britain's second-biggest mortgage lender.

Santander, the Spanish bank that bought Abbey for £8.5 billion four years ago, will acquire A&L, Britain's ninth-largest mortgage provider, for 299p a share, or 317p after shareholders keep their 18p interim dividend. Investors will get one share in Santander for every three A&L shares.

At 299p, shareholders receive a premium of more than 36 per cent on A&L's Friday closing price of 219p but it is a far cry from last year's high of £12.00 a share. The stock rose 54 per cent after news of the deal emerged before closing up almost 53 per cent at 335p.

Institutional shareholders immediately derided the offer as too low. David Cumming, head of UK equities at Standard Life Investments, said: “They are acquiring A&L on give-away terms. I would be amazed if no one else counters with a higher offer in the next few months.”

Yet bankers played down the possibility of a rival bid. An offer from any of the five biggest UK banks would encounter objections from the competition authorities for consolidating the current account market. A banker said: “It's very unlikely that any British bank will try to upset this Anglo-Spanish party.”

Clive Cowdery, the insurance entrepreneur who tried to buy Bradford & Bingley (B&B) last month, was not thought to be interested.

David Bennett, A&L's chief executive, defended the offer, which the bank considered over the weekend. He said that despite speculation that A&L had rebuffed far more generous approaches from Santander last year and Crédit Agricole the year before, “we only received one offer ... We weren't seeking bidders [and] we haven't had any other talks with any other party”.

He said that fears over the worsening British economic environment and no sign of improvement in global credit markets had made A&L nervous of the future. “It was just the sheer uncertainty,” he said.

Nevertheless, he refuted suggestions that A&L needed to raise additional capital or would have been unable to continue independently, and he denied that there had been a substantial downturn in trading. In its first-quarter update in May, A&L said that only 0.57 per cent of its mortgage customers had missed more than three months' of payments, compared with the industry average of 1.34 per cent.

Alan Gillespie, the Ulster Bank chairman who was appointed A&L's new chairman last Wednesday, said yesterday that he would not take up the role.

Mr Bennett and António HortaOsório, Abbey's chief executive, denied that the Spanish-backed bank had been pressured into a rescue bid for A&L by financial regulators concerned about the stability of Britain's banking system. “This is a commercial transaction,” Mr Horta-Osório said.

The deal contains a standard material adverse change clause, Mr Bennett said, but added that there was little chance that Santander would dump A&L in the same way that TPG Capital had walked away from its investment in B&B. “I'd suggest that they're committed to this,” he said.

Documents will be posted to shareholders next month and the deal will be completed by October.

Santander cut 5,000 jobs at Abbey but said yesterday that cost-saving plans were not predicated on shedding staff. The A&L brand would be kept in the short term.

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