26 Jun, 2025

Spanish government decision on BBVA takeover of Sabadell throws deal into doubt

Banco Bilbao Vizcaya Argentaria SA's bid to acquire Spanish rival Banco de Sabadell SA looks increasingly uncertain after the Spanish government imposed conditions on the deal that significantly reduce its appeal.

The Spanish government finally sanctioned the all-share takeover, initially priced at €12.3 billion, on June 24 after a prolonged process of approvals by various authorities in the country. As part of the deal, BBVA must maintain two separate legal entities for at least three years, which the government could extend to five years pending a review, and Sabadell must retain management autonomy during that time.

The conditions, which are in addition to and more severe than those already placed on the deal by the Spanish competition authorities, cast significant doubt on BBVA's ability to deliver the €850 million of annual cost savings it hoped to achieve when launching the deal.

"All of these remedies are putting another stone in the path for BBVA to achieve those cost synergies," Nuria Álvarez, bank equity analyst at Madrid-based investment services firm Renta4Banco, said in an interview. "BBVA will have to explain what the benefit of this operation is going to be if they continue with this."

Conditions

The Spanish government's conditions on the deal would see Sabadell's management retain control over the provision of credit, particularly to SMEs, human resources management, along with branch network management and banking service provision.

The decision on whether to extend the conditions to five years from three will be made by the government between two and six months before the end of the three-year period. The decision will be based on whether BBVA has a strategy in place to protect the "general interests."

The hostile takeover of Sabadell by Spain's second-largest lender by total assets, launched in May last year, has faced opposition from Spain's Socialist government from the outset. Ministers, who were concerned about the deal's impact on competition in the banking sector, employment, financial stability and "territorial cohesion," had threatened to veto the deal as the Spanish government has the final say on mergers and acquisitions.

BBVA estimated that it could save €850 million annually if it merged with Sabadell. €750 million of this would come from cost synergies, split between €300 million in staff cuts and the remainder from savings on technology and administrative costs.

"The government's decision might not translate into fewer cost synergies, but BBVA might only be able to achieve these synergies over a longer period," said Álvarez.

Previous remedies

The government's conditions further dilute the appeal of the takeover after Spanish competition authorities' approval of the deal in April placed several conditions on its execution. Among the Spanish National Markets and Competition Commission's (CNMC) remedies were a commitment to not close branches and to maintain commercial terms and conditions in poorly served and underprivileged areas, and to provide continued support to small- and medium-sized enterprises and the self-employed.

BBVA has three options following the Spanish government's decision, according to Benjamin Toms, bank equity analyst at RBC Capital Markets.

Firstly, it could continue with the deal without increasing its offer. Sabadell's share price has surged by almost 50% since BBVA made its bid, which represented a premium of 30% at the time. A second option would be for BBVA to take the Spanish government to court and challenge its decision based on a breach of European law, said Toms. Or thirdly, the bank could also walk away from the deal.

"Our view on this transaction has changed over the last month," Toms said in a June 24 note. "We believe that BBVA should walk away from Sabadell and compensate shareholders for a messy year with a large buyback."

Second time around

BBVA's bid for Sabadell is its second attempt in a few years to acquire its midsized rival. The bank made a similar move in 2020. Negotiations collapsed due to disagreement over Sabadell's value.

The original bid "fairly valued" Sabadell, Johann Scholtz, senior equity analyst at Morningstar, said in an interview. Upside for BBVA from the deal has to come from cost synergies, which the remedies imposed by the CNMC and Spanish government reduce, he added.

"I would hope that they show the discipline to walk away at some stage," Scholtz said. "I assume they've got their red lines and once those red lines are crossed, they've got the discipline to walk away."