MADRID (May 9): Spanish bank BBVA launched a hostile €12.23 billion (RM62.1 billion) all-share takeover bid for Sabadell on Thursday, after its smaller rival rejected the same proposal earlier this week.

Taking the offer directly to Sabadell shareholders came as a surprise as hostile takeovers are rare in European banking and can end up embroiled in months of negotiations as politicians and regulators weigh in.

BBVA's decision comes after Sabadell's board on Monday said the unsolicited bid significantly undervalued the bank's potential and growth prospects. The board repeated that position on Thursday.

Shares in BBVA, which dropped after the takeover offer was unveiled last week, fell another 6% on Thursday to their lowest since early March, eating into the premium that Sabadell shareholders would get for accepting BBVA shares under the deal. Shares in Sabadell rose 3%.

The Spanish government opposes the hostile takeover bid and is concerned the merger would have potential harmful effects on the Spanish financial system and impact jobs and customers, a source at the Economy Ministry said.

Spain's Economy Minister Carlos Cuerpo said the government has the last word on authorising a BBVA and Sabadell merger.

BBVA aims to create a lender with more than 100 million customers globally and assets exceeding €1 trillion, second only to Santander among Spanish banks, in an effort to rebalance its business back towards Spain and away from Mexico, its main market.

"We are presenting to Banco Sabadell's shareholders an extraordinarily attractive offer to create a bank with greater scale in one of our most important markets," said BBVA's executive chairman Carlos Torres Vila.

The chairman told analysts on a call that he was confident the government would appreciate the value of the proposed deal "once the dust settles" on recent events. He acknowledged that upcoming elections on Sunday in the Spanish region of Catalonia — the region where Sabadell has its main operational headquarters and which would be most affected by the deal — made for "a bit of a charged environment."

He also said the bank had reached out to some sizeable Sabadell shareholders who responded favourably to the proposed transaction. Retail investors own almost half of Sabadell's shares. Big institutional investors include BlackRock and Dimensional Fund Advisors.

The offer needs a minimum approval of 50.01% of Sabadell shareholders.

One recent example of a rare hostile bid for a European bank was Intesa's successful takeover of UBI Banca in 2020.

"In our view, the deal is now a question of price and that both banks negotiate and abandon the hostile route," Alantra analysts said in a note.

"In our view, a hostile bid could be a lose-lose for both banks. Sabadell would defend itself, but the damage to the franchise remains to be seen as this could be a lengthy process," they said.

BBVA offered an exchange ratio of one newly issued BBVA share for every 4.83 Sabadell shares, a premium of 30% over April 29 closing prices. That premium was worth just 8% on Thursday, valuing Sabadell at about €11 billion, according to Reuters calculations.

A large shareholder in BBVA said that the bank's share performance would be critical to the bid's success, given there was no cash component in the deal and BBVA could not afford to pay one. The slide in BBVA shares on Thursday showed investors were lukewarm about the transaction, the shareholder added.

Second attempt

It is the second attempt at a tie-up between BBVA and Sabadell. They called off merger talks in November 2020 after failing to agree on terms, including the price tag.

The latest move comes as Spanish banks have been looking for ways to increase revenue as a boost from high interest rates begins to fade.

"Banco Sabadell has done an excellent job, with remarkable progress in recent years, and now its shareholders can join an entity with an unparalleled combination of growth and profitability in Europe," BBVA chief executive Onur Genc said.

The deal, which BBVA estimates could bring cost savings of €850 million before taxes, would give Sabadell shareholders a 16% stake in the combined lender.

The combined entity would overtake Caixabank as Spain's biggest domestic lender.

Spanish banking has gone through waves of consolidation, with the number of lenders down to 10 from 55 before the 2007/08 global financial crisis.