Here's why BBVA just launched a hostile bid for Sabadell

By Barbara Kollmeyer

The Spanish government doesn't appear in favor of the deal

Fixes name of the bank in the headline.

BBVA has stepped up its efforts to acquire Banco de Sabadell, launching a hostile bid on Thursday following a rejection by its smaller rival, and as the Spanish government appeared to take a dim view on such a deal.

"We are presenting to Banco Sabadell's shareholders an extraordinarily attractive offer to create a bank with greater scale in one of our most important markets," BBVA Chair Carlos Torres Vila said in a statement. "Together we will have a greater positive impact in the geographies where we operate, with an additional EUR5 billion loan capacity per year in Spain."

Rejecting the first attempt earlier this week, the board of Catalan lender Sabadell said it was "highly confident in Banco Sabadell's growth strategy and its financial targets and is of the view that Banco Sabadell's standalone strategy will create superior value for its shareholders."

Shares of BBVA (ES:BBVA) (BBVA) fell 6% in Madrid, while Sabadell shares (ES:SAB) rose more than 3%. U.S.-listed shares of BBVA suffered similar losses in premarket trading.

Sabadell's market capitalization of just over EUR9.7 billion (equivalent to $10.4 billion) pales in comparison to BBVA's EUR60 billion.

The two banks have a history of merger talks. In November 2020, discussions between the banks broke down, reportedly because BBVA wasn't willing to pay enough for Sabadell's TSB arm, according to Reuters, which cited sources familiar with the situation.

Sabadell was in a much weaker position at that time, with profits tumbling in 2020 after the bank set aside billions of euros to deal with issues related to the pandemic. Earlier this month, Sabadell reported forecast-beating results and lifted its profit guidance for 2024. BBVA, meanwhile, lifted its annual profit target after its own profit and earnings beat forecasts in recent results.

BBVA's reasons to chase the Catalan lender are unlikely to have changed. The bank appears keen to rebalance a footprint away from its emerging markets, and the acquisition would boost the bank's market share to 20%, a team of Citigroup analysts led by Marta Sanchez Romero said last week when BBVA made its first attempt.

Some concerns, she said, surround the ultimate price that Sabadell may accept, the future of TSB and capital that would be consumed by a potential unwinding of Sabadell's joint venture.

Earlier this week, the Citi analysts said the Sabadell board is probably looking for a cash side to the deal, and BBVA has plenty of capital, but "management has struggled so far to convince investors of the transaction's merit."

"If the deal were to go through in the end, the process could take several months based on the previous deals we saw in Spain given the time it would take to call the EGM and obtain the regulatory approvals," added Barclays analyst Cecilia Romero Reyes, in a note last week.

And Thursday indicated the Spanish government may be less than keen. Spain's economy minister Carlos Cuerpo said the government will have the "last word" on such a deal. And he said it is viewed unfavorably, due to competition concerns and possible effects on financial markets and clients, in comments to broadcaster RTVE.

Also commenting was Catalan separatist Carles Puigdemont, whose failed independence bid for the region in 2017 sparked a crisis in the country. He has been campaigning for his separatist JXCat party ahead of regional elections in Catalonia on Sunday from exile in Belgium.

He said the hostile bid by BBVA over its smaller rival must be completely and fully contested. "For some time, there has been a strategy to liquidate Catalan banking activity, and this harms users and harms the country," he said in translated comments on the social media platform X.

Spanish banks overall have been in a sweet spot, thanks to higher interest rates and a strong economy. S&P Global Ratings recently lifted its outlook to positive for six of the country's biggest banks, noting a significant improvement in profit in 2023, continuing what was seen in 2022.

"Although the sharp increase in interest rates certainly supported banks' performance, they also benefited from the lean operating structures developed through more than a decade of downsizing and significant consolidation, combined with tight control over funding costs," said S&P analysts led by Elena Iparraguirre.

The analyst added that Spain's economic "growth prospects are sound, and growth will outpace that of European peers." Data recently showed Spain was still the fastest-growing of the euro area's four biggest economies, thanks in large part to a tourism boom that has rebounded since the pandemic.

BBVA highlighted the fact that expected growth for Spain is higher than that of the rest of the eurozone, and also that both households and companies have deleveraged more.

BBVA also said the two banks are complementary, with Sabadell having a higher market share in small-to-medium-sized enterprises, while BBVA has a larger retail presence.

In an all-share proposal, the Spanish lender (BBVA) (ES:BBVA) offered one new BBVA share for every 4.83 Banco de Sabadell (ES:SAB) share, the same as its initial May 1 proposal that valued Sabadell at around EUR12.3 billion ($13.18 billion).

BBVA said the offer represents a 30% premium over the closing price of both banks on April 29 and a 50% premium over the weighted average prices of the past three months.

-Barbara Kollmeyer

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05-09-24 0929ET

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