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* Sabadell offering 340p per TSB share, 29 pct premium
* To raise 1.6 bln euros of new capital
* Sabadell attracted by UK economic conditions, margin
* Sabadell made approach to TSB on Feb. 27
* Sabadell CEO says in a position to grow in UK market (Adds comments on timing of approach, growth strategy)
By Matt Scuffham and Jesús Aguado
LONDON/MADRID, March 20 (Reuters) - Spain's Banco Sabadell could look to expand further in Britain after agreeinga 1.7 billion pound ($2.5 billion) takeover of TSB, oneof the biggest cross-border banking deals since the financialcrisis of 2007-09.
Sabadell, Spain's fifth-biggest bank, said it planned togrow TSB into a significant challenger to Britain's "Big Four"lenders -- Barclays, HSBA.L, Royal Bank ofScotland and Lloyds Banking Group, from whichTSB was spun off last year.
Sabadell's bigger domestic rival Santander isalready the main challenger to those four after buying AbbeyNational a decade ago. Subdued markets at home are pushingmid-sized Spanish banks into foreign acquisitions.
Chairman Josep Oliu said Sabadell was attracted to Britainby the strength of the national economy and healthy margins.
"The financial sector in the UK has margins that areacceptable, similar to the ones that we have in Spain and higherthan the ones we have in other European countries," he said.
Sabadell said TSB would be better able to grow under itsownership and the enlarged business could target more deals.
Oliu told reporters in London that Sabadell would take a"step-by-step" approach to growing its British business.
Speaking to reporters in Barcelona, Sabadell Chief ExecutiveJaime Guardiola said: "The UK challenger market isunconsolidated. Clearly, we'll build our first platform, butit's clear that there is room for consolidation. We are in aposition to grow."
The group will have a number of opportunities if it decidesto accelerate growth through more acquisitions.
Clydesdale Bank has been put up for sale by its ownerNational Australia Bank. New bank OneSavings said this week it would listen to takeover offers while thegovernment is selling $13 billion of home loans held by bailedout Northern Rock and Bradford & Bingley
Sabadell is having to raise 1.6 billon euros ($1.7 billion)to finance the TSB deal and the need for further funding couldhold it back.
"OUT OF THE BLUE"
Oliu revealed that Sabadell had begun to look "seriously" atthe possibility of a bid for TSB in January and approached TSBChairman Will Samuel about a possible offer on Feb.27.
TSB CEO Paul Pester said the approach came out of the blue.
"It was a Friday morning and I was in our normal weeklymanagement meeting, which ended promptly. My PA (personalassistant) came to the door and said 'Will needs to speak to youquickly'. Of course it was a surprise," Pester told reporters.
Sabadell is offering 340 pence per TSB share, a 29 percentpremium to their price the day before its approach was announced and compared with the 260p at which Lloyds sold a firsttranche of shares in June last year. The proposed takeover wasformally announced on March 12.
TSB shares were up 2.1 percent at 334p by 1610 GMT andSabadell was up 4.8 percent.
Lloyds, ordered to sell TSB by European regulators as acondition of its 20 billion pounds bailout during the crisis,said on Friday it had agreed to sell a 9.99 percent stake toSabadell and entered into an irrevocable undertaking to sell itsremaining 40.01 percent.
Cross-border takeovers have been rare in the banking sectorsince the crisis, with bigger banks focusing on slimming down tobolster their capital and meet tougher regulations.
Sabadell is funding the deal via a 1.6 billion euro capitalincrease, issuing new shares at 1.48 euros per share in aproportion of 3 new shares for each 11 old ones.
It said the deal is part of its strategy to become moreinternational and would mean 22 percent of its assets areoutside Spain, up from 5 percent at the end of 2014.
TSB's Pester and Finance Director Darren Pope will continuein their current roles, the banks said.
Sabadell said it will also provide a strong technologyplatform for TSB to use, which could provide cost savings ofabout 160 million pounds annually three years after thetakeover.
Lloyds, which is providing TSB's technology platform under a10 year deal, will pay 450 million pounds to support themigration of the IT platform to Sabadell.
TSB is currently Britain's seventh biggest lender with 631branches and a 4.3 percent market share.
Sabadell, founded in 1881 in north-eastern Spain to servelocal industry, has doubled its size over the past five yearsand now has 2,220 branches in Spain, serving around 6,500customers. ($1 = 0.6784 pounds) $1 = 0.9355 euros) (Additional reporting by Paul Day and Elisabeth O'Leary;Editing by Keith Weir)
