By Victoria Klesty and Gwladys Fouche
OSLO (Reuters) -Norway's largest bank DNB launched an all-cash offer on Thursday to buy domestic rival Sbanken for 11.1 billion Norwegian crowns ($1.3 billion) in a bid supported by both companies.
Sbanken's shares surged 32% to a record high of 105.40 crowns, above DNB's offer of 103.85 crowns, suggesting that some investors believe competing bids could emerge.
"The board of directors is of the opinion that the offer reflects the strong financial and strategic value of the Sbanken group and implies an attractive valuation for shareholders," said Sbanken Chairman Niklas Midby.
The takeover, if successful, would increase DNB's share of the Norwegian mortgage market to an estimated 27% from about 24% and also strengthen its asset management business.
DNB's shares rose 2.1% to 184.5 crowns by 1052 GMT.
The transaction will lead to cost cuts at both banks and is expected to boost DNB's earnings and return on equity.
"The deal ... in our view makes sense from a strategic point of view as it further strengthens DNB's footprint in Norway, one of the more attractive retail banking markets in the Nordics," Credit Suisse said.
However, Sbanken could also attract other Nordic banks with cash to spare, including regional heavyweight Nordea, said Kepler Cheuvreux analyst Robin Rane.
Sweden's SEB and Swedbank, which do not offer retail banking in Norway, are also potential suitors, he added.
"It would be a strategic shift for them, but one that's not impossible," Rane said of the Swedish duo.
Danish analysts said Danske Bank could also be in the frame.
DNB, however, has secured the right to match any rival offers that may emerge, Chief Financial Officer Ottar Ertzeid said on a conference call. Only if it fails to do so can Sbanken's board recommend another suitor, he said.
Shareholders representing about 29% of Sbanken's capital have agreed to the offer, including biggest stakeholder Altor, which holds 25% of the shares. DNB has also secured a stake of more than 5%.
Sbanken was established in 2000 as a pure-play digital bank in Norway and was listed in 2015.
DNB was advised by in-house broker DNB Markets while Sbanken was advised by Arctic Securities.
Completion of a takeover, which requires approval from Norwegian financial and competition regulators, is expected in the third quarter of 2021, DNB said.
The Norwegian competition authority said it would hold a meeting with DNB and Sbanken next week about the proposed transaction. After being notified by the banks, the watchdog has 25 working days to make its first assessment.
"In our opinion there is no reason why this would not go through," said DNB finance chief Ertzeid.
The Financial Supervisory Authority of Norway was not immediately available for comment.
($1 = 8.3984 Norwegian crowns)
(Writing by Terje SolsvikAdditional reporting by Colm Fulton in Stockholm, Tim Barsoe in Copenhagen and Jagoda Darlak in GdanskEditing by David Goodman)