The Spanish government is pushing BBVA to coexist separately with Sabadell.

MadridBanco Santander took control of Banesto in 1998, but it wasn't until 2013 that the latter disappeared, fully integrated into the former. Now, that scenario could be repeated, but with BBVA and Banc Sabadell as protagonists, and the reason is the condition, based on reasons of public interest, that the Spanish government has decided to add to the hostile takeover bid. This Tuesday's Council of Ministers agreed to require BBVA to keep Banc Sabadell separate for three years, with the possibility of extending it for another two years, for a total of five years.

Specifically, the Spanish government's condition implies that BBVA and Sabadell "maintain separate legal personality and assets for three years," as well as "autonomy in the management of their activities." This does not mean that the takeover bid, and therefore the merger, cannot be successful—if BBVA decides to continue with the process, it could take control of Sabadell if more than half of the Valles-based bank's shareholders decide to sell their shares—but it does hinder the merger that BBVA can subsequently request. Thus, Sabadell will take place as a takeover bidder, but not a merged bank, for at least three years.

Once these three years have passed (the clock starts ticking this Tuesday), "the effectiveness of the condition will be evaluated and the Council of Ministers will determine whether it is necessary to extend it for two more years," explained Economy Minister Carlos Cuerpo at a press conference on Tuesday. However, this is the only condition approved by the Spanish government and is added to the conditions of the National Commission on Markets and Competition (CNMC), which the executive has also accepted.

When the government's deliberations were announced, the National Securities Market Commission (CNMV) suspended trading in both banks for a few hours, until it was lifted again. BBVA closed the day up 2.54%, to €13.1 per share, and Banc Sabadell registered a modest rise of 0.45%, to €2.6 per share.

Sabadell's autonomy in managing its activities and making decisions should be extended to financing and credit, particularly to small and medium-sized enterprises; also to human resources, i.e., the workforce; the branch network and banking services; and, finally, the banks' social work through their respective foundations.

Thus, the Spanish government relies entirely on this autonomous management, which is the backbone of the condition (the legal obligation), to ensure, for example, that staff are not laid off or that credit is maintained (the essence of the government's measure). "What we are seeking is for autonomous management to maximize the value of each entity separately [...], which guarantees that, due to the operation [the integration between BBVA and Sabadell], there will be no reduction in staff," Cuerpo reasoned.

Likewise, it would allow for the preservation of the five elements of general interest that, according to the executive, are affected by the operation: the maintenance of sectoral regulations linked to growth and business activity, worker protection, territorial cohesion, social policy objectives related to the social work of foundations, financial consumer protection and housing, and financial consumer protection and housing.

However, the decision-makers would be a new board of directors, with the new owner (BBVA if it ends up taking control of Sabadell) able to select a majority of its members.

What will BBVA do?

The scenario of a bank being taken over, but not merged, contradicts the philosophy of a merger like the one proposed by BBVA, which opens the door for the bank to withdraw its offer. The economic key behind a takeover bid for 100% of the share capital, as in this case, is the merger and the resulting cost synergies (savings). The idea of the company launching the takeover bid (BBVA) is to acquire the clients and business of the other company (Banco Sabadell) and to gain a financial margin, mainly due to the resources saved by avoiding duplications, which usually translates into reduced staffing levels or the integration of technology platforms. Ultimately, the scenario that opens up with the condition imposed by the Spanish government (operating independently and not merging) means that these duplications disappear as an argument for, for example, laying off employees.

In any case, BBVA has previously argued that "even if [the merger] doesn't go ahead or is delayed, the operation still makes sense" because they would continue to "connect all the synergies," in the words of the bank's president, Carlos Torres. After learning of the government's decision, the Bilbao-based bank has simply stated that it is "evaluating" the transaction, as evidenced by a relevant fact sent to the CNMV.

Sources at Sabadell recall that if it decides to proceed with the transaction, BBVA must "provide information on the impact of the conditions." "We want to reiterate our confidence in the solidity of [Sabadell's] solo project," the same sources maintain.

In the 25-page Cabinet agreement that sets out the condition, and to which ARA has had access, the Spanish government asserts that its requirement "does not eliminate the synergies that this operation [the takeover bid for Sabadell] may entail, and, in any case, its possible reduction will not be made" indefinitely. In fact, it is this temporality that, in the eyes of the Spanish government, makes the condition of keeping the entities separate "proportional."

Evaluation of the agreement

To evaluate the effectiveness of the agreement, between six and two months before the end of the three-year term, BBVA and Banco Sabadell must submit a report detailing the autonomous management model implemented and its contribution to protecting public interest criteria. Depending on the results of this report, BBVA could request the merger or consider maintaining its governance status. In any case, it will depend on the government in power.