BBVA and Sabadell, at a standstill to avoid a misstep

SantanderIt's been more than 14 months since BBVA launched its hostile takeover bid for Banc Sabadell, and its outcome has yet to be resolved. Initially, no one imagined the timeline would be so long, which has led the operation to become a debate (and media coverage) about the public statements of both sides. What is said from one side or the other fills the agenda, rather than the facts themselves. However, this does not mean that there are no decisive issues on the table for the continuation, or not, of the takeover bid. In fact, both BBVA and Sabadell are at an impasse to avoid making a false move.

In the case of the former, it must decide which path to follow after the Spanish government has conditioned the operation to which it there is no merger between the two banks for three years (There would only be integration). Meanwhile, Sabadell must crunch the numbers to determine whether or not it makes sense to get rid of TSB, its British subsidiary.

The headache of synergies

BBVA is on the verge of what it has been demanding all along: that Sabadell shareholders will determine the future of the transaction. That is, if they sell their shares to BBVA during the acceptance period. Following the Spanish government's decision, the next natural step would have been to close the prospectus with the National Securities Market Commission (CNMV) with all the information about the transaction. Once approved, the acceptance period would open.

However, the status of Pedro Sánchez's government directly disrupts the synergies or cost savings that occur when a merger occurs: the acquiring bank typically lays off employees, closes branches, and combines technological capabilities to avoid duplication. BBVA has always maintained that the transaction presents "very significant synergies," although it has also affirmed that without a merger, the operation still makes sense. Specifically, it has quantified these at €850 million: €450 million in administrative and technological savings, €300 million in personnel savings, and €100 million in financial savings. Given that the Spanish government's position complicates, among other things, the merger-related layoffs, the €300 million in personal savings are diluted.

"We are analyzing all options," BBVA's director in Spain, Peio Belausteguigoitia, indicated this week. The bank's number three mince words and left all scenarios open: from continuing with the operation, despite the impact on cost savings, to withdrawing it, or even taking the government's decision to court.

Convincing shareholders

"BBVA must strike a difficult balance between pleasing its own shareholders and those of Sabadell," says a now-retired senior banking executive. The executive refers to the fact that there is a segment of the market that suggests BBVA will have to improve its offer to ensure that a majority of Sabadell shareholders sell their shares, especially given its performance on the stock market. In fact, if the takeover bid ultimately goes through, but with a much better offer, some see it as an opportunity for Sabadell itself: "Its shareholders could be grateful because [the chairman and CEO] have managed to get paid more," comments a market source.

However, when it comes to BBVA's own shareholders, the bank must justify why, despite the negative impact on synergies, the move to merge the two banks still makes sense. "The offer was priced at conditions that are more onerous today [for BBVA shareholders]. [...] Since you can't merge the companies for another three years, the efficiency gains will come later," the financier reasons. "Economic rationality would tell me it's time to back out, but sometimes emotions weigh more," he adds.

However, some don't view the Spanish government's position as being so "tough," so it shouldn't pose a problem for BBVA when it comes to finding the arguments to continue with the operation. A source familiar with the sector links this to the fact that a merger process isn't usually immediate and points out that the Spanish government's decision doesn't affect BBVA's ability to consolidate its results with those of Sabadell. "That would allow it to dilute the impact of synergies," he points out. Also, BBVA's exposure to Turkey and Mexico favors the markets where Sabadell is strong: the United Kingdom and Spain.

The same source believes that BBVA's next step is to initiate a round of contacts with its shareholders, especially international investors. "International investors may see [the current situation] as a weakness from an economic perspective because you don't have added value in the synergies," indicates the same former source. Furthermore, the benefits from these synergies allowed them to avoid putting the brakes on the macroeconomic performance of Turkey or Mexico, markets where volatility is not in their favor. "I think [BBVA] is trapped here," he comments.

TSB: Goodbye, ten years later?

But BBVA's decision, or rather, its timing, does not overlook the fact that Sabadell is immersed in the possible sale of its British subsidiary, TSB, which would leave the bank much smaller. Initially, the move was interpreted as an offensive by the Valles-based bank to defend itself against the takeover bid, but the entity has denied it. The CNMV has not detected, so far, any violation of the duty of passivity.

Offers from Santander and Barclays are on the table, according to reports. Bloomberg TV And financial sources confirm to ARA. Sabadell must analyze these expressions of interest, and especially the price. The bank bought TSB in 2015 for €2.3 billion, and after a turbulent start, the business has now revived. "Today the market has a good valuation and could use this to remunerate shareholders," market sources indicate.

For all these reasons, the takeover bid remains shrouded in mystery, although some have seen it this way since its inception. "[Hostile bids] are never well received, much less within the same country," comments one source. The manager of the takeover bidder, in this case Josep Oliu and César González-Bueno, often plays fast and loose to hinder the process. "Oliu has always been a man of few words. Now [with the takeover bid] he has nothing to do with it," assures someone who knows him closely, adding that "he will fight to the end." Furthermore, in the case of BBVA's takeover bid for Sabadell, there is a "very clear" political component. Various sources consulted agree that the takeover was initiated after a leak and just before the regional elections in Catalonia. "It's time for BBVA to consider whether the acquisition is worth it or not," reflects the former financier.