The offer is in

BBVA + Sabadell Merger, In The Making

BBVA plus Sabadell.
BBVA plus Sabadell.

Jefferies | BBVA (Buy) sub­mitted an offer for Sabadell (Restricted) less than 24 hours after BBVA’s in­terest was leaked to the press. The deal im­plies c4% EPS en­han­ce­ment and a 30bps ca­pital cost for BBVA, in line with our ba­se­line pu­blished yes­terday (3% and -20bps res­pec­ti­vely) as the higher pre­mium (30%) is offset by larger cost sy­ner­gies (€850m vs. our €550m es­ti­ma­te). Deal logic is suf­fi­ciently clear and valid for us.

The offer is in

Following confirmation of interest yesterday, it did not take long for BBVA to submit a formal offer this morning. The offer implies 30% premium over Sabadell’s share price as of the close of April 29th (equivalent to €2.26/share or 1.0x P/TNAV), in an all-paper deal.

BBVA claims the deal is expected to lead to c3.5% and 1% accretion on EPS and TNAV respectively for a modest 30bp CET1 cost, and without impacting the group’s current shareholders’ remuneration plans. The integration of both banks in Spain is expected to produce €850m in pre-tax annual cost savings, for an upfront pre-tax restructuring charge of €1.45bn. BBVA is offering three seats to Sabadell on its Board, including the vice-chairman position.

Despite the premium, numbers work for BBVA

In this report we update the base-line scenario we outlined yesterday, see BBVA/Sabadell | Well Done is Better than Well Said. While we estimated a similar EPS and CET1 impact (3.3% EPS accretion, 20bp CET1 ratio hit), the offer is richer in price and involves 100% equity (we assumed 20% cash). The €850m gross cost savings target is 55% higher than our initial estimate (€550m), implying 16% of the combined cost base (and 40% of Sabadell’s domestic cost base). Exhibit 1 presents our updated math based on the disclosed financial terms. We note there might be further impacts such as 1) some revenue attrition from overlapping clients, 2) FV adjustments taken in relation to the loan portfolio, 3) a hit from unrealized losses on the fixed income portfolio, not deducted from Sabadell’s CET1, 4) some capital benefit from Sabadell suspending its ongoing share buyback (already deducted from Sabadell’s CET1 – similar to witnessed with NationWide/VMUK). Without considering the net of those effects, we reach a 4% EPS accretion (versus 3.5% est by BBVA), a 3% TNAV accretion (+1%), and a 15bp hit to CET1 (-30bp).

The strategic rationale appears valid

The potential combination of BBVA and Sabadell would leave the new entity with a c19% share in loans, not far from CaixaBank (23.4%) and Santander (17.5%), the two market leaders currently. Sabadell has a larger relative exposure to SMEs (c33% of the total lending portfolio, and an estimated market share in SME lending of 13%) whilst BBVA offers the most dimensioned/optimal platform where any Spanish retail business can sit longer term in our view. A combination of the two banks would somewhat tactically dilute BBVA’s exposure to EM also (from 77% of earnings to 66%, pro forma). Put shortly, deploying capital to buy Sabadell at 1.0x P/TNAV looks sufficiently attractive post synergies, it would tactically trim BBVA’s EM profile and would not alter its shareholder remuneration plans significantly.

Commitment to the UK?

The press release briefly mentions Sabadell’ presence in the UK (TSB), which would “add to BBVA’s global scale”. We note BBVA owns a stake in Atom Bank, a UK digital player. It remains to be seen what BBVA’s stance would be in the country; it could stay and try to optimize the franchise or use it as a source of capital for the group (TSB’s total RWAs stand at €12.7bn as of FY23).

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