Banking

Why is BBVA's stock market soaring while Sabadell's stock is collapsing?

The market reacted strongly to the results of the operation, affecting the rest of the banking entities.

Madrid / BarcelonaThe outcome of BBVA's hostile takeover bid for Banco Sabadell has not gone unnoticed by the market. The Spanish stock market has reacted strongly to the failure of the operation: BBVA shares have soared, while Sabadell shares have fallen, something analysts had already anticipated in a scenario where the takeover bid were to fail (it has obtained support from 25.47% of Sabadell's share capital, below the minimum required), currently at 3%

On the one hand, investors are positive that BBVA's path will continue from now on without being linked to the Valles-based bank. Shares of the bank chaired by Carlos Torres soared as much as 10% at the market opening and closed the day up 5.98%, reaching €16.66. On the other hand, Sabadell shares fell sharply—more than 6.5% at market open and 6.78% at close—and recovered to levels close to those before the takeover bid, at €3.01.

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Now, what explains why BBVA, initially the losing bank in the deal, grew so much, while Sabadell collapsed despite being the winning bank?

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A relatively unexpected result

The takeover bid could have three outcomes. The first, the least likely according to analysts, was that BBVA would obtain support from more than 50% of Sabadell's shareholders and take control of the bank. The second, which is what actually happened, was that the takeover bid would fall through, meaning the Biscayan bank wouldn't obtain the minimum 30% stake in the Valles-based entity required by regulations for the operation to go ahead. And the third was that between 30% and 50% of Sabadell's shares would accept BBVA's offer and, according to regulations, BBVA would have to improve the offer with a cash payment.

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This last option was the most plausible in the eyes of the markets, which led many funds and small investors to buy Sabadell shares—or those who already held them to choose not to accept BBVA's offer yet—hoping they could receive more money with the second offer. Finally, these investors have found that the takeover bid has fallen through because the required 30% was not reached. "Those who stayed in Sabadell waiting for an improvement [in the offer] will now not get it and, therefore, will sell" some or all of their remaining Sabadell shares, explains Xavier Brun, academic co-director of the master's degree in finance and banking at UPF Barcelona School of Management and head of securities at the fund manager Trea AM. This explains the Valle del Cauca bank's fall.

And BBVA, why is it rising so much? In this case, there are two factors. The first is that the bank missed the call. cousin-in-law of the takeover bid. This premium was the additional cost that the Basque-based bank was going to pay to take control of Sabadell. In any takeover bid—and even more so if it's hostile—the acquiring company must convince the company's owners that it wants to acquire the company by offering them a price higher than the shares' actual value. The fact that the transaction didn't go through means that, in a sense, BBVA now recoups the additional money it would have had to pay to gain control of its Catalan competitor.

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The second factor, Brun points out, is the announcement of changes in "shareholder remuneration": BBVA's management recently announced a buyback of its own shares worth €1 billion and the payment of a record dividend of €0.32 per share. This makes BBVA's shares much more attractive compared to the day before, when it was going to dedicate the money to acquiring Sabadell, as the profitability per share increases considerably. Firstly, because it will pay more dividends than expected if the takeover bid had been successful, and secondly, because the fact that the bank itself is buying back its own shares means there are fewer of them on the market and, therefore, the value of each share increases: directly because the bank is worth the same, but its value is spread across fewer shares; and also because, in the future, each share will receive a larger share of the profits.

The stock market, therefore, "is rewarding the short term more" in its valuation of BBVA, Brun adds.

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More than a year paired

It should be noted that over these 17 months, the share prices of BBVA and Sabadell have evolved in parallel and have been adjusting to market expectations regarding how the transaction would be completed. In this regard, analysts also pointed out that in a fall, so-called opportunistic funds, which only invest to obtain a profit, could come into play. These funds, which invest only to obtain a profit, have sold their shares again since the failure of the takeover bid. Despite the fall, the market sees an attractive future in Sabadell, especially after presenting a new strategic plan in which the promised remuneration to shareholders is high.

"I attribute [the rise in the stock market's value] to the end of uncertainty," said BBVA Chairman Carlos Torres in a press conference this Friday morning. The market had been speculating for days about the scenarios that could arise once the results were announced, including the possibility of a second takeover bid (in the event that only between 30% and 50% of the share capital had participated in the takeover bid), which would have extended the process timeline until 2026. They also started the day in the red. For example, CaixaBank and Santander began the day with falls of more than 4% on the Spanish stock market. Aside from the outcome of the takeover bid, the uncertainty in recent hours in the US commercial banking sector is negatively impacting stock markets across Europe. The epicenter of the problems are Zions Bancorp and Alliance Bancorp, which revealed problems with lending.