BBVA reassesses Sabadell Bid after Spanish government imposes integration freeze

The Spanish banking behemoth BBVA is considering its €14 billion hostile takeover of smaller rival Sabadell, following the Spanish government's imposition of a five-year moratorium on combining the two banks' operations, which casts doubt on the viability of projected cost savings.

Peio Belausteguigoitia, BBVA's head of operations in Spain, said Wednesday that the bank would "shortly" determine whether to proceed with its unsolicited offer for Sabadell, emphasising that the bank was not likely to postpone its next step.

"All options remain on the table," Belausteguigoitia stated, including withdrawing the offer completely or taking legal action in reaction to the government's restrictions.

Regulatory conditions challenge synergies

On Tuesday, the Spanish government imposed a stipulation that BBVA and Sabadell may not merge for up to five years.

While Spanish law permits BBVA to acquire Sabadell stock, any future merger is subject to regulatory clearance, which gives the government considerable control over the outcome.

According to analysts, the freeze might leave BBVA with majority control of Sabadell but unable to undertake the integration required to obtain cost reductions, weakening the bid's financial basis.

The most pressing concern for BBVA is the reconsideration of around €850 million in planned cost savings over two years.

Belausteguigoitia added that the bank is presently reviewing the ramifications of the government's decision, with a particular emphasis on technological efficiencies.

IT and administrative savings in focus

BBVA has also argued that most of the synergies could be realised even without a total merger, especially in IT. Most of the synergies are in IT, Belausteguigoitia reiterated.

Until yesterday, BBVA estimated that approximately 450 million euros of the savings would come from administrative and IT measures.

But with the government also prohibiting any layoffs or closures, the bank may have fewer avenues through which to reduce costs.

These limitations have increased the paranoia of investors. BBVA shares were down 2.5% at 1004 GMT on Wednesday, while Sabadell stock fell by 1.5%.

Uncertainty looms as CNMV review nears

BBVA´s tender offer prospectus is still pending approval from Spain´s market regulator, CNMV, and more steps are to be seen once the regulator issues its approval.

Citi analysts wrote in a note to clients that they had not anticipated the government decision, which subsequently halted BBVA from moving forward with the tender.

However, they said the bank was likely to revise its cost synergy guidance and timelines following the review by the regulator.

At the same time, Sabadell is disputing BBVA's claims about anticipated synergies. The bank's spokesperson reiterated that BBVA needs to clarify how much in cost synergies BBVA expects, which Sabadell disputes.

Next steps: awaiting BBVA's decision

With the offer hanging in the balance, BBVA has a limited time to decide on its next steps. While the merger can still proceed legally, the path to actual operational integration has been stalled for years, potentially putting BBVA in strategic limbo.

For the time being, the market is kept waiting as BBVA considers the new cost-benefit calculation of purchasing a bank that it may not be able to completely integrate for another half-decade.

It remains to be seen whether the promise of IT-driven savings is sufficient to justify pushing further, or whether BBVA will back out.