BBVA: Sabadell Takeover Makes Strategic Sense, but Offer Price Looks Full

Narrow-moat Banco Bilbao Vizcaya Argentaria confirmed on May 1 that it proposed a merger to the board of Banco Sabadell, Spain's fourth-largest bank. While we believe the strategic rationale for the deal is compelling, we think BBVA is offering a full price. We estimate that BBVA's all-share offer values Sabadell at 0.9 times its latest tangible book value. This valuation seems about right if we consider that PitchBook consensus expects a return on tangible equity of around 11% over the next three years. Still, it does not leave much on the table for BBVA shareholders. The upside to BBVA shareholders will primarily come from synergies. BBVA expects annual synergies but will incur EUR 1.5 billion in cumulative restructuring costs to achieve this. Our narrow moat rating for BBVA relies mainly on the strength of its highly profitable Mexican operation. One can argue that the dilution of the Mexican contribution narrows BBVA's moat. However, the deal will strengthen BBVA's competitive position in Spain significantly, which could force us to reconsider our previous view that BBVA does not possess a moat in its Spanish business. Until there is greater clarity, we will maintain our EUR 11.50 per share fair value estimate.