The second attempted merger between BBVA and Banco Sabadell is underway. The bank chaired by Carlos Torres has launched the proposal that, if materialized, could give rise to the third largest European bank by capitalization, with more than one trillion euros in assets. Here are some keys to the possible operation that would leave an avalanche of large numbers and many unknowns.

Why is BBVA interested in Banco Sabadell?

BBVA's proposal represents the second assault in just four years to try to close a merger with its smaller rival. The objective of the entity chaired by Carlos Torres would be to acquire a smaller bank but with a complementary business both geographically and by customer niches. In particular, BBVA would focus on Sabadell's activity in Spain with small and medium-sized companies, which would allow it to grow and gain scale in that segment. Furthermore, BBVA, according to its own proposal, is interested in “Banco Sabadell's presence in the United Kingdom” which would add to “BBVA's global scale.” So far, Mexico and Turkey are the other major markets of the bank of Basque origin, in addition to Spain. According to its first quarter results, the North American country contributed 56.5% of its profits for the period. The Eurasian, 5.6%.

According to the letter sent by BBVA to the president of Sabadell, Josep Oliu, the merged group would become “one of the largest and most solid financial entities in Europe”, with total assets of over one billion euros and more than 100 million clients. Worldwide.

What does BBVA offer?

The entity has made known its intentions regarding Sabadell in two phases. The first, on Tuesday, April 30, only recognized the interest in the Catalan entity. In the second, on Wednesday, May 1, he specified the price and some other details. It should be remembered that in the first merger attempt carried out in November 2020, the price was the element that put an end to the negotiations, since Sabadell considered that the offer did not sufficiently value the entity's potential.

In this new attempt, the key is once again the price. BBVA offers to pay only in shares, through an exchange of 4.83 Sabadell shares for each one of BBVA, which means valuing each Sabadell share at a premium of 17% over the last closing price on the stock market (30% over the price on Monday, before the first information). The entity chaired by Jospe Oliu would retain approximately 16% of the merged group. And it means valuing Banco Sabadell as a whole at around 11.5 billion euros, around 2.1 euros per share according to BBVA's closing date on Tuesday.

Regarding governance (an extreme that was never an obstacle in the first merger attempt in 2020), BBVA proposes that the management team of the resulting entity would be formed with executives from both banks. In addition, it offers the entry of three members of the current board of directors of Banco Sabadell to the new board.

What does Banco Sabadell think?

The courted entity has not yet commented on BBVA's proposal. In a relevant fact sent to the CNMV on Tuesday, April 30, it was limited to confirming that it has received a written invitation to the merger. “The board of directors of Banco Sabadell will properly analyze all aspects of the proposal,” he said.

And now what will happen?

There is still no evidence that both entities have begun negotiations. In fact, the operation was carried out by the British network SkyNews on Tuesday, April 30, and according to this information, the proposal would still be in a very initial phase. The leak forced BBVA to issue a relevant fact confirming its interest.

The market assumes that, after holding a board of directors meeting, both banks will sit down to discuss possible terms of the operation. On BBVA's side, interest is evident after the communications sent to the market regulator (CNMV). On Sabadell's side, it is inferred that managers have the responsibility of studying any purchase proposal that is presented to them, at least to try to maximize the value of the entity for its shareholders and interest groups.

If there are negotiations, will they end in a merger?

There is no guarantee that the talks will result in a merger. From the point of view of the intended, Sabadell could say no, as it already did in 2020. At that time, the union was rejected due to differences over the price to be paid and this time the offer is four times what was placed on the offer. table. On the offering side, BBVA itself has set only one condition for the operation to go ahead: having the relevant authorizations. The purchase would need the approval of European authorities, the Minister of Economy, Carlos Body, and Competition. If these obstacles are overcome, the merger would be in the hands of the shareholders: the two entities would have to approve the operation at an extraordinary meeting.

When would the merger take place?

Without losing sight of the previous point (it could very well not happen), it is worth asking about the deadlines. As expected, uniting two banks is neither easy nor quick (unless the viability of one of the parties is in danger, as in the case of Santander-Popular or UBS-Credit Suisse, which is then quick, but not easy. ). It is not possible to speak with exact times today, but there are examples of recent mergers in the sector that can help give a slight idea of ​​how long a movement of these characteristics can take.

In the case of CaixaBank and Bankia, September 4, 2020 was when the negotiations officially emerged. On the 18th of that same month and year, both councils gave the green light to the merger. At the beginning of December 2020, it was approved at separate shareholder meetings. On March 23, 2021, the CNMC allowed it. On March 26, the legal procedures were completed and Bankia was no longer listed on the Stock Exchange. More than seven months passed – almost eight – between the first confirmation of negotiations and the official consummation.

In Unicaja-Liberbank it took even longer. The confirmation of conversations was at the beginning of October 2020. It was approved by both councils on December 29 of that same year. The shareholders gave their approval on March 31. The Government agreed on July 19. The operation was completed on August 2, when the absorbed Liberbank ceased trading. Almost 11 months later.

How will it affect savers?

In principle, clients would not have major changes if the merger were carried out. As has happened with other mergers in Spain (Caixabank and Bankia or Santander and Popular), the clients of the absorbed entity become clients of the absorbing entity without carrying out any procedure on their part. Depending on the commercial policy applied to them, credit card or deposit conditions may change; This is not the case for mortgages, which will maintain the conditions previously agreed upon. In this case, BBVA has left the door open for the Banco Sabadell brand to continue existing as such in some regions “in which it may have a relevant commercial interest.” A nod to maintaining the name of Banco Sabadell in Catalonia.

All in all, the big and key question that the CNMC will study is how the operation and the resulting concentration of the sector could affect future offers in the financial sector and competition. Already currently, the interest paid by the main Spanish banks on savers' deposits is far from the rate set by the ECB. According to data from the Bank of Spain, in April deposits had an average rate of 2.4%, compared to the 4.5% set by the ECB. The authorities will have to decide whether or not this concentration could harm customers. If carried out, three banks would account for 70% of the total loans and deposits in all of Spain.

And to investors?

Last Tuesday, when the exact amount of the bid was not yet known, the possible merger left Banco Sabadell shareholders with gains of 3.37% on the stock market. The offer, at market price, represents a premium of 17%, after the news on Tuesday weighed on BBVA's stock and boosted that of Sabadell. Taking Monday's close as a reference, the premium is 30%. For BBVA shareholders, although the initial reaction was that of a 6.6% drop in the stock market, the entity has prepared a series of arguments in which it defends the advantages that this movement has for them.

Given that the purchase is carried out through a share exchange, the merger would imply relative dilution for BBVA shareholders if it goes ahead: they would have a smaller part, but of a bank with more assets and profits. Specifically, Sabadell shareholders would own 16% of the capital of the merged entity, a fact that has the counterpart of diluting the stakes of BBVA shareholders by that same percentage. In exchange, in its letter collected from the CNMV, BBVA estimates that they would be holders of the securities of a financial entity with a better result. According to BBVA's calculations, the profit that Sabadell would bring to the new entity, plus the positive effect of cost savings, would mean a 3.5% improvement in earnings per share from the first year.

In terms of profitability, BBVA calculates a return on investment of 20% in 2026 for its shareholders. “All this with a limited impact on the CET1 of approximately -30 basis points at the time of the merger, while maintaining BBVA's attractive shareholder remuneration policy,” the entity writes. In recent years, BBVA has carried out programs worth 5,363 million to remunerate shareholders through dividends and share buybacks. Now, in light of this movement, it indicates that it hopes to keep its current dividend distribution policy unchanged, with a pay out between 40% and 50% of the net profit.

And to the employees?

BBVA indicates in its merger proposal letter that it is not considering adopting “traumatic measures” with workers. Another thing is that there are duplications of functions and possible office closures, although it is too early to assess this. In this sense, the second vice president and Minister of Labor and Social Economy, Yolanda Díaz, warned this Wednesday of the possibility that the merger could lead to an employment regulation file.

In the most recent mergers of the sector in Spain, layoffs were one of the steps that followed the unification of the entities. In the case of the merger between Unicaja and Liberbank, there was an Employment Regulation File (ERE) that affected 1,513 employees. In CaixaBank and Bankia, the largest round of layoffs in the history of the sector was carried out, with an agreement that left 6,452 people affected.

The potential merger between BBVA and Sabadell could affect up to 4,000 employees, according to calculations made by EAE Business School professor Ricardo Zion, given the possible duplications generated by the operation.

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