The breakdown of tie-up talks between Banco de Sabadell SA and Banco Bilbao Vizcaya Argentaria SA will cheer BBVA shareholders who may now look forward to a substantial share buyback, while Sabadell may hunt for a smaller merger partner.
The two lenders called off discussions Nov. 27 after they failed to agree on a price, less than two weeks after announcing talks.
Signs of cracks between the two began to show when El Economista reported Nov. 20 that Sabadell wanted BBVA to sweeten the deal. An offer valuing the bank at €2.5 billion, largely in line with its current market value, was on the table, the paper reported, but Sabadell management believed that the offer was too low given its book value of €12.7 billion.
Valuation
"They have a completely misplaced and ridiculous viewpoint about their valuation," Daniel Lacalle, chief investment officer at fund manager Tressis Gestión, said in an interview. "That's why they are falling so hard in the stock market."
Sabadell's shares were down 11.06% at 4:05 p.m. Madrid time Nov. 27, while BBVA's shares were up 3.53%.
"There was no reason for BBVA to chase this deal, and we are happy that it walked away. For talks to resume, there will have to be compromises from one or both parties. ... we believe BBVA holds all the cards and should not be the one making any material concessions," Johann Scholtz, an analyst at research and investment management firm Morningstar, said in an email.
Sabadell did not immediately respond to a request for comment.
Buyback
Just hours before announcing the merger talks, BBVA said it had agreed to sell its U.S. business for $11.61 billion and would use the additional capital for buybacks and potential M&A.
"Investors received with great support the idea that they will increase the buyback because any investor in BBVA has been suffering immensely in the last years," Lacalle said. BBVA shares have lost close to 50% of their value over the last three years.
When contacted by S&P Global Market Intelligence, BBVA reiterated that a buyback is "an attractive option at current market prices."
Talks between the two came at a time of increasing pressure on banks to merge as a way to bolster sagging profits. In Spain's overbanked market, it would also help reduce branches and cut costs. Merger fever had been heating up in Spain after CaixaBank SA said it would take over Bankia SA and as Unicaja Banco SA resumed talks with Liberbank SA.
As of 2019, the country had 49.7 bank branches per 100,000 adults, as opposed to 38.8 branches per 100,000 adults in Italy and 34.3 in France, according to World Bank data. Germany has about 11 branches per 100,000 adults.
Sabadell said it will now focus on its domestic business and prepare a new strategic plan for 2021. It also said it will look at "strategic alternatives" for its U.K. subsidiary, TSB Banking Group PLC, which has undertaken a major restructuring plan following a bungled IT migration in 2018. It earlier reportedly engaged Goldman Sachs to assess options and has now specifically asked the U.S. investment bank to find a buyer, sources told Reuters.
Risk
Lacalle said Sabadell would find it difficult to a buyer for TSB, noting that the bank's exposure to small-and-medium-sized business lending placed it at significant risk, given an expected upsurge in bad loans related to the economic impact of the coronavirus. The bank's profitability and solvency are also very weak, he noted.
Sabadell's return on average equity, a key measure of profitability, stood at 1.85% at the end of the third quarter, compared to 11.86% for BBVA, according to S&P Global Market Intelligence data.
Javier Santacruz, an economist who specializes in the Spanish banking sector at the Instituto de Estudios Bursátiles, a Madrid business school, said he expected Sabadell to bet on a merger with a smaller lender such as Ibercaja Banco SA, Kutxabank SA or ABANCA Corporación Bancaria SA.
"Sabadell continues to think it's a large bank and wants to be the main player in any partnership," he said.