Banco Bilbao Vizcaya Argentaria: Offer for Garanti a Brave but Sensible Decision

Narrow-moat Banco Bilbao Vizcaya Argentaria, or BBVA, announced an offer to acquire the 51% stake it does not own yet in its listed Turkish subsidiary, Garanti. Suffering from spiralling inflation and a collapsing currency, Turkey does not seem an obvious investment destination currently. The market agreed with this sentiment; BBVA’s share price has declined by 6% since the announcement. The market now values BBVA at EUR 2.1 billion less than before the announcement, while the buyout will require a capital layout of EUR 2.2 billion by BBVA. Effectively, the market believes the deal will be fully value destructive but we disagree. Garanti is an excellent bank that BBVA knows inside out; BBVA is getting it at a fantastic price and there are capital synergies. The deal will boost BBVA’s earnings by 14% and it will improve BBVA’s return on equity. We view potential higher volatility due to currency translation as the main downside risk of the deal. We expect to increase our current fair value estimate of EUR 6.10/share by at least 10% should the transaction go through. Until we have greater clarity on how many Garanti investors accepted the offer, we will maintain our fair value estimate at EUR 6.10/share.