BBVA, the Spanish bank facing obstacles in its €10bn hostile bid for Banco Sabadell, is arguing the deal would still be worthwhile even if it only gets half of what it wants — owning Sabadell without being able to merge with it.
Spain’s Socialist-led government is firmly opposed to the proposed acquisition of the TSB owner, which would be the biggest transaction in European banking this year. But while it can veto a merger of the two entities, it cannot stop Carlos Torres, BBVA’s executive chair, from launching his all-share tender offer to Sabadell shareholders.
That has pushed Spain into uncharted territory and sparked a debate over the extent to which two entities can act as if they have merged, while remaining legally separate and vying for the same clients.
Torres has argued from day one that if the banks merge, he would achieve €850mn in annual cost savings. Last week, however, he said that even if BBVA ended up owning two detached Spanish banks, “the operation would still be extremely attractive”.
While describing a non-merger takeover as “far less likely”, he said: “Our estimates are that we could optimise to a large extent the savings in overheads and technology costs.”
But people close to Sabadell, which rejected a friendly approach in May from BBVA, say that argument is spurious. “That’s really either ill-informed or wishful thinking,” said one person familiar with the smaller bank.
There would be few precedents for BBVA owning two Spanish banks “because it doesn’t make sense”, the person said. “Why own something that is competing with you? It’s counter-intuitive.”
Rodrigo Buenaventura, the head of Spain’s market regulator, said on Friday that he wanted BBVA to spell out in its bid prospectus what synergies it would achieve if it could not merge the two banks.
Hugo Cruz, European banks analyst at KBW, said the financial assumptions behind Torres’s optimistic comments were unclear. “I can see that there could be some synergies in IT. You could try to consolidate the back office. But if the companies are separate, the synergies will be a lot smaller.”
If the merger were blocked, the person familiar with Sabadell estimated that the cost savings would be just €100mn-€150mn per year, far less than BBVA’s initial €850mn target.
BBVA, which is valued at €54bn, has the third-biggest share of Spain’s €1.2tn loan market, while Sabadell, led by chief executive César González-Bueno, is the number four player. Combining the two would enable BBVA to leapfrog Santander to grab second spot, behind CaixaBank.
But Carlos Cuerpo, the economy minister fronting the government’s opposition to the deal, has warned that an already high level of concentration in the Spanish banking sector “could become excessive as a result of the merger”.
Last week he highlighted two implications. First, there are financial stability risks inherent in having just three giant banks. Second, a lack of competition could make banks too slow to give savers the benefit of interest rate rises, or borrowers the benefits of cuts.
Beyond cost efficiencies, the deal would help BBVA rebalance its heavy exposure to Mexico, a fast-growing but unpredictable market that delivered 56 per cent of net profit in the first quarter of 2024. BBVA is “at risk of becoming a Mexican bank with a Spanish HQ”, said one Sabadell shareholder.
If the deal is done it will not happen until next year. BBVA is awaiting approval for its bid from the European Central Bank and Spain’s antitrust and market regulators before it can open its tender offer to Sabadell shareholders, which it wants to do before the end of the year and could last up to 70 days.
They are being offered the chance to own 16 per cent of the combined entity. But they would be voting without knowing whether or not the two banks will be permitted to merge. Carlos Peixoto, analyst at CaixaBank BPI, said the risk of a combination being blocked could be a “significant deterrent” to Sabadell shareholders contemplating the bid.
The government’s ruling on the merger plan would be the final stage of the process, probably in mid-2025. A person close to BBVA said it would be hard for ministers to say no once regulators had said yes. But lawyers sympathetic to Sabadell disagree, arguing that “the law is silent” on what factors the government can consider in its judgment.
Because BBVA has not provided a breakdown of where exactly it would extract €850mn of merger savings, it has sown doubts about what it might do if it could not absorb Sabadell.
It has, however, indicated that it is relying less on job cuts than some investment bankers had expected.
Reducing headcount and shutting branches, and thus eliminating duplicative costs, have traditionally been the way to boost profits after bank mergers.
But Torres said last week that “the bulk of the cost savings here are not personnel costs”, noting that both banks had already slimmed down drastically in Spain during the pandemic: Sabadell cut 1,800 jobs in 2020 and BBVA slashed 3,000 in 2021.
Francisco Riquel, analyst at Alantra Equities, said that even without a “legal merger”, BBVA could execute an “operating merger” that would yield meaningful results, including via branch closures. It could, for example, shut either BBVA or Sabadell branches in certain locations and encourage customers to switch to the other. “Whether the clients want to is another thing,” he said. “That’s the execution risk.”
BBVA could also integrate Sabadell’s back office systems into its own technology platforms even without a legal merger, although Riquel said an IT sourcing contract between the two banks would probably be needed. Sabadell would also enjoy a lower cost of funding because it would be backstopped by BBVA.
But Germán López-Espinosa, professor of accounting at Iese Business School, said that without a merger the two banks could not consolidate the regulatory capital they have to hold. “Sabadell would still be a legal entity and would have to meet all the requirements for capital, provisions and so on,” he said. “Overall, it would be less efficient.”
The only precedent in Spain for one bank owning two competing lenders is provided by Santander. In 1994 it took a controlling stake in its troubled rival Banesto but opted not to merge with it. Ana Botín, now Santander’s executive chair, ran Banesto from 2002 to 2010 and oversaw some IT integration with the other bank. But when Santander announced a full-blown merger in 2012, it said “significant efficiencies can still be achieved”.
One banker in Madrid said Torres had to sound sanguine about the prospect of a non-merger “because it wants to reduce tensions with the government”. Cruz at KBW said it “might be a way of sending a message to the government that they are really serious about this”.
Another possibility is that BBVA is playing a long game, recognising that Socialist prime minister Pedro Sánchez has changed his mind on other big issues, or may not last a full term until 2027.
An adviser to European banks said BBVA wanted to appear open to a non-merger in the hope that “over time, the government will change its mind, or simply change, and that they will eventually be able to merge both banks”.
Additional reporting by Ortenca Aliaj in London
