All eyes on the BBVA-Sabadell premium: how decisive is it?
With the new offer from the Basque entity, the difference has remained positive but at an unconvincing level.
BarcelonaSince BBVA announced its new offer on Monday, September 22, two days before the closing date for doing so, the rules of the game have changed. The new offer, now validated by the National Securities Market Commission (CNMV) BBVA is now offering one BBVA common share for every 4.8376 Banc Sabadell common shares. This change, according to BBVA, improves the offer by 10% and improves tax conditions for shareholders, who will no longer have to pay a tax to the Treasury, provided that BBVA manages to exceed 50% shareholder acceptance.
Before this improvement, the initial offer proposed one new BBVA common share and 70 cents for every 5.5483 Sabadell common shares. This ratio, following the sharp rise in Sabadell shares since the takeover bid began, had left a negative premium in recent months for investors who decided to accept the change. This means that, until the Friday prior to the offer modification, it was more profitable for Sabadell shareholders to sell their shares on the market than to participate in the takeover bid. In fact, in some weeks the premium had reached negative 15%.
With the improved supply, the premium situation has changed. In fact, since it was announced last Monday, the premium has remained positive all week, although it has moderated. On Monday itself, following BBVA's announcement, the shares of both banks fell between 2% and 4%, placing the premium at around positive 3%. However, throughout the week, Sabadell rose more—proportionately—than BBVA, and on Friday, at market close, the premium stood at 1.02%. But to what extent does the premium matter? Is it enough for it to be merely positive?
Convincing the shareholder
Knowing how key the premium is to determining the success of this operation encompasses many factors and even differing opinions among experts. To begin with, it's important to differentiate between the type of shareholder: small or individual shareholders, just over 45%, and institutional investors. "We must look at who Sabadell's investors are, and the top ten are financial investors, and they don't sell a share unless they make a profit," notes Xavier Brun, professor of finance (UPF-BSM) and director of equity at Trea Capital.
"With the negative premium, it was better to sell in the market than in BBVA, but not anymore. Looking only at the numbers, it's now better to sell in BBVA than in the market, even if it's a very small premium. This creates a snowball effect, and there may be an incentive, especially for Sabadell's large investors," explains the professor.
However, the incentives for small shareholders may be different. "The long-time shareholder, let's say Ms. Maria, has some sentiment, and may need a much higher profit than a 1% premium to even consider a takeover bid," says Brun. UPF professor Oriol Amat also points out this: "We must keep in mind that not all shareholders decide solely based on the price offered and the premium; there are other relevant factors," such as the impact on solvency, the level of competition, or the reduction in credit, among others.
Furthermore, Amat also points out that "for shareholders who only look at the price, the decision depends on their valuation of the shares." In this regard, he recalls that "several analysts currently place them at around four euros, well above what BBVA is offering; therefore, the offer is not attractive," he states.
At the same time, there's the dilemma of the uncertainty of the scenarios posed by this takeover bid. "Someone might think: if I go to the takeover bid, but it doesn't exceed 50%, I could lose; but if I don't go and the majority is reached, I could also lose," Brun points out. "It's a prisoner's dilemma: it's best for everyone to collaborate, but the incentive leads them not to collaborate."
The optimal premium
The chairman of Sabadell has said in several interviews that, if the offer were to increase by 30% compared to the original, the bank's board could consider it. It's impossible to know what premium a 30% increase would offer, since the premium depends on the performance of both BBVA and Sabadell shares. However, for Brun, "a 10% premium would be decisive."
"10% isn't just a one-off. Ultimately, investors want a return on the stock market, generally between 8% and 10% annually; if they offered this, it would be decisive," Brun points out.
The risk
One of Sabadell's arguments to convince its shareholders to stay where the business is. Sabadell is a smaller, local bank, focused primarily on Catalonia and the Spanish market. In contrast, BBVA is a more international bank that derives a large portion of its profits from emerging markets, notably Mexico, South America, and Turkey.
For Sabadell, switching to BBVA means "taking on more risk," explained Sabadell CEO César González-Bueno, due to the risks that these economies and their inflation entail. However, Brun believes this could be attractive to a certain type of investor: "If we look at the two banks combined, BBVA is a more dynamic bank, and therefore Sabadell shareholders would go from a calm bank to a riskier one, but that could also mean a more profitable one, because there is more risk," he explains.
