BBVA’s takeover bid for Banco Sabadell has made headlines in the financial press in recent weeks. Initially a friendly bid, it turned hostile after the Catalan bank’s board of directors rejected it. What did not change was the price, one BBVA share for 4.83 Sabadell shares: a low price for many analysts.
Despite the negative connotation of the word “hostile”, which simply means that the bid is being made without prior agreement with the directors of the target company, the information shareholders need to make a decision is how much they will receive in exchange for their shares. Regardless of what the media say, the final figure will be provided in the takeover bid prospectus, the document that BBVA must send to the National Securities Market Commission in Spain, together with the application for authorisation of the bid, in which all the details of the operation are explained. In addition to the blessing of the securities markets supervisor, BBVA must obtain the approval of the National Markets and Competition Commission and the European Central Bank. In the merger which will ultimately occur, the Ministry of Economy would also have the last word.
But let’s not get ahead of ourselves, because the current scenario could unfold in different directions. A white knight – or several – could emerge with a better counter-offer. And not only better in terms of the purchase price, as the effects on the composition of capital or competition in the sector, and more strategic considerations are also taken into account. This latter aspect means that the emergence of white knights is often supported by political powers.
Another possible outcome is for the takeover to fail. If analysts agree on one thing, it is that neither bank needs the merger. The credit profile of both is good and the current context of high interest rates and slow growth benefits the sector as a whole. Sabadell, moreover, has completed a restructuring process that makes it a solvent and, above all, highly profitable bank for shareholders, so shareholders would not lose much if the merger does not go ahead.
On the other hand, BBVA shareholders will have to face the risk of dilution. With the incorporation of Sabadell’s capital, the number of shares in circulation will increase and, as a result, capital will be “diluted” into more parts, thereby reducing the theoretical value of each share. Perhaps this phenomenon is behind the initial fall in its share price after the announcement of the hostile takeover bid.
Ultimately, the process will be long and there will be many obstacles to overcome to reach a successful conclusion. In the meantime, this is an opportunity to review some concepts and learn new ones with an eye on current events.