BBVA And Sabadell: High Probability Of Agreement; Shareholders To Obtain A Value Generation Near 30%

Santander Corporate & Investment | In our opinion, a possible acquisition of 100% in cash of Banc Sabadell by BBVA would generate significant value for the shareholders of both banks. BBVA and Banco Sabadell confirmed this week that with the authorization of their Boards of Directors, they are holding conversations about a possible merger of both entities.

As usual, the banks have initiated a process of reciprocal review (due diligence) and have appointed external advisors.

Value creation of more than 6 billion euros. A potential value creation of 6.3 billion euros (equivalent to 26% of the stock market capitalization of BBVA) is estimated for the shareholders of BBVA, assuming a 100% cash offer with a premium of 30% over the stock market capitalization of Sabadell as of Monday (16 November). In this way, both shareholder bases would obtain, thanks to the operation, a value generation similar to 30% and the execution risk would naturally fall on BBVA, being the acquirer.

In principle, according to our calculations, a capital increase would not be required to finance the transaction. Assuming that the sale of BBVA’s U.S. retail business for c.9.7 billion euros to be collected in full in cash is successfully completed, we estimate that BBVA would be able to finance the transaction entirely with excess capital.

We estimate that BBVA would have a capital ratio FL CET1 of c.12% after meeting the costs of acquisition (3.1 billion euros) and restructuring (2.7 billion euros net of taxes) and raising provisions for bad debt (0.5 billion euros net of taxes). We see no regulatory obstacles.

The entity resulting from the merger of BBVA and Banco Sabadell would have a market share of c.24% in Spain in loans to customers and c.23% in customer deposits, as opposed to shares of 30% and 28%, respectively, in the case of the combination of Caixabank and Bankia, so we do not foresee any problems on the regulatory front for the potential transaction.

We see a high probability that an agreement will be reached. Although the process is in its first phase, in view of the good strategic and financial arguments supporting the merger, we believe the chances of its successful completion are high.

We reiterate our recommendation to Buy BBVA because of its attractive valuation, despite its recent stock market appreciation.