How BBVA could outfox the Spanish government

The electoral dramas in the UK and France over recent days have put most other European news in the shade. But in Spain, too, a political hoo-ha is playing out — at least for bank investors, as the fate of Europe’s biggest sector deal since the shotgun UBS-Credit Suisse combination hangs on the views of prime minister Pedro Sanchez and his leftist coalition.

When BBVA, the Spain’s second-biggest bank by market value, said in May that it wanted to buy smaller rival Sabadell, the idea was not only rejected by the target’s board, triggering BBVA’s hostile approach direct to shareholders. The Spanish government also signalled its rejection of a deal “both in form and substance” because of its expected impact on competition and jobs.

Last Friday, notwithstanding all that, BBVA’s shareholders backed the share issue for the bank’s all-stock bid, currently worth about €10bn, on the basis of its offer to exchange one new BBVA share for 4.83 Sabadell shares. The week before, BBVA’s irrepressibly bullish chair Carlos Torres told the Financial Times the bid was “unstoppable”.

In truth, even discounting the government’s opposition, there are multiple hurdles along a very long path given Spain’s merger and acquisition rules typically mean deal processes extend for months if not years. And any one of these obstacles could stop the takeover in its tracks.

The next challenge is that the European Central Bank must opine on the deal through a prudential lens — probably just a formality given both banks’ decent capital cushions. The Spanish securities market regulator may also take a benign view, though it is expected to force BBVA’s prospectus to be fulsome in its risk disclosures — particularly around the government’s opposition and what this would mean in practice: namely that an acquisition could still take place, but that a merger of operations, and thus the extraction of €850mn of planned cost synergies, could not.

There is also an antitrust assessment by Spanish regulators. Even Torres is realistic that remedies may be necessary. Analysts point to a potentially excessive market share in the Catalonia region, particularly in banking to small and mid-sized companies.

Yet these process hurdles are not the only issue for BBVA. Just as serious would be any volatility in the share price throughout the drawn-out timetable — gyrations that could be magnified if merger arbitrage funds start swarming. Quarterly performance will be one trigger. But so will an imminent change of president in Mexico, which generated more than half of BBVA’s net profits in the first quarter.

And then of course there is the small matter of persuading Sabadell’s shareholders to sell. Institutions accounting for close to a quarter of the investor base may have a positive view, according to data analysis by Bloomberg. But to get the deal over the line, the close to 50 per cent of Sabadell’s shares owned by retail investors (including many of its own customers and staff) could be decisive.

Torres is confident he can sway them with the improved prospects that would come from owning shares in BBVA which trade above book value and at a near 50 per cent premium to Sabadell’s. The chair insists the current terms will not be changed, though bankers believe an element of cash may ultimately be added to sweeten the deal for retail investors.

Overarching everything is the Spanish government’s antipathy to the deal, all the more resolute because Sanchez’s coalition is shaky and is propped up by Catalan independence parties which he antagonises at his peril. 

Torres, though, is determined, patient and wily. On the face of it, for example, the proposed deal envisages an oddly modest tally of synergies, with no branch closures or job cuts — despite the fact that between them BBVA and Sabadell have 3,000 branches, six to eight times more than a comparable UK bank. When the groups discussed a deal four years ago, they planned bolder synergies that topped €1bn, according to people familiar with that situation. Experts believe synergies now could be 50 per cent higher, with at least 20 per cent of branches cut. 

Saying that publicly would of course kill any prospect of government approval. But if Torres can play down the points of contention in the short term, and keep the deal process going, the extended transaction timetable may actually be his greatest ally. At some point, today’s hostile government is likely to give way to a more business-friendly administration.

patrick.jenkins@ft.com