425: BBVA Sweetens Sabadell Offer by 10%, Improves Tax Terms

BBVA has increased its offer for Banco Sabadell by 10% and improved the tax treatment for shareholders, making the consideration entirely in shares.

Summary

• BBVA has increased its offer for Banco Sabadell by 10%, valuing Banco Sabadell shares at 3.39 euros per share, their highest level in over a decade.
• The new offer entails one new BBVA share for every 4.8376 Banco Sabadell shares, with the consideration now being 100% in shares.
• This all-share consideration means capital gains for Banco Sabadell shareholders would not be subject to taxation in Spain if acceptance exceeds 50% of voting rights, qualifying the transaction as tax-neutral.
• The equivalent value of the offer has risen by 60% since April 29, 2024, from an initial 12.2 billion euros to the current 19.5 billion euros.
• Banco Sabadell shareholders accepting the offer would receive a 15.3% stake in BBVA, benefiting from an expected earnings per share (EPS) c. 41% higher than with a standalone Sabadell.
• The premium over Banco Sabadell's share price is substantially improved and approximately 30 percentage points above the average of similar European banking deals.
• For BBVA shareholders, the transaction is expected to be accretive to EPS by c. 3% from the first year post-merger, with an incremental return on investment (ROIC) of around 17%.
• The transaction is projected to have a limited impact on BBVA's CET1 capital ratio, approximately -21 basis points at closing, improving to +40 basis points after the sale of TSB and distribution of Banco Sabadell's extraordinary dividend.
• BBVA's Board of Directors has waived the possibility of making further improvements to the consideration and extending the acceptance period.
• The merger aims to create a stronger bank with greater scale, increasing capacity to finance businesses and households by an additional 5.4 billion euros per year and supporting SMEs and the self-employed with credit volume guarantees.

Sentiment

Score: 8

Explanation: The filing presents a significantly improved offer with clear financial benefits for both Banco Sabadell and BBVA shareholders, strong strategic rationale, and positive financial impacts for BBVA. The tax neutrality for Banco Sabadell shareholders is a major positive. The only minor negatives are the waiver of further improvements/extensions and the initial slight dip in CET1, which is expected to recover.

Positives

• The offer for Banco Sabadell shareholders has increased by 10%.
• The offer values Banco Sabadell shares at 3.39 euros per share, the highest in over a decade.
• The current equivalent value of the offer has risen by 60% since April 29, 2024, from 12.2 billion euros to 19.5 billion euros.
• The consideration is 100% in shares, offering tax neutrality in Spain for capital gains if acceptance exceeds 50% of voting rights.
• Banco Sabadell shareholders would gain a 15.3% stake in BBVA, benefiting from an expected EPS c. 41% higher than standalone Sabadell.
• The premium over Banco Sabadell's share price is significantly improved and well above the average of similar European banking transactions.
• The transaction is accretive to BBVA's EPS by c. 3% from the first year following the merger.
• BBVA expects a high incremental return on investment (ROIC) of around 17%.
• The impact on BBVA's CET1 capital ratio is limited, with an initial -21 basis points at closing, improving to +40 basis points post TSB sale and extraordinary dividend.
• The combined entity will increase its capacity to finance businesses and households by an additional 5.4 billion euros per year.
• BBVA has committed to unprecedented remedies with the CNMC, supporting SMEs and the self-employed with guarantees to maintain future credit volumes.

Negatives

• BBVA's Board of Directors has waived the possibility of making further improvements to the consideration.
• BBVA's Board of Directors has waived the possibility of extending the acceptance period.
• The CET1 capital ratio for BBVA will experience an initial decrease of approximately -21 basis points at the closing of the transaction.

Risks

• BBVA's ability to complete the transaction.
• BBVA's ability to control Banco de Sabadell, S.A. following completion of the transaction.
• Limitations on the information about Banco Sabadell to which BBVA has had access.
• BBVA's ability to fully realize the expected benefits and synergies of completing the transaction.
• General risks detailed in the Registration Statement on Form F-4 and in BBVA's annual reports on Form 20-F and current reports on Form 6-K.

Future Outlook

The transaction is expected to be accretive to BBVA's earnings per share from the first year following the merger, with a high return on investment. It aims to build a stronger bank with greater scale to address structural challenges in the financial industry, particularly growing investments in technology. The combined entity is projected to increase its capacity to finance businesses and households by an additional 5.4 billion euros per year.

Management Comments

• BBVA Chair Carlos Torres Vila stated: "With this improved offer, we are putting an extraordinary proposal in the hands of Banco Sabadell shareholders one that combines a historic valuation and price with the opportunity to participate in the substantial value generated by the integration. All of this will result in a significant increase in the expected earnings per share in the future, if they tender their shares."
• BBVA CEO Onur Gen commented: "The combination with Banco Sabadell is a growth project that will increase the capacity to finance businesses and households by an additional 5.4 billion per year, following the merger. Moreover, BBVA has taken on unprecedented remedies with the CNMC, which reflect a firm support to SMEs and the self-employed, who will benefit from guarantees to maintain future credit volumes that would not exist without this transaction. Banco Sabadell shareholders who accept the offer will be part of a bank with a much higher potential of growth and value creation, with an ability to achieve 41 percent higher earnings per share than they would obtain otherwise. We invite them to join us in building a project that will bring significant benefits to customers, employees and shareholders of both entities and to society as a whole."

Industry Context

The announcement highlights the intensifying need for larger banks in Europe to address structural challenges, particularly in a context of increased spending and investment. Greater scale is becoming crucial in the financial sector to spread the fixed costs associated with growing investments in technology, such as digitization, cybersecurity, data, and AI, across a broader customer base to achieve greater efficiency. This transaction aligns with the broader trend of consolidation and technological investment within the European banking industry.

Comparison to Industry Standards

• The offer values Banco Sabadell shares at their highest levels in more than a decade.
• The premium over Banco Sabadell's share price is significantly improved and approximately 30 percentage points above the average of similar transactions in European banking.

Stakeholder Impact

• **Banco Sabadell Shareholders**: Receive a 10% increased offer, a valuation at a decade-high, and tax-neutral share consideration, along with a 15.3% stake in a larger entity with 41% higher expected EPS.
• **BBVA Shareholders**: Expected EPS accretion of c. 3% from the first year, a high incremental ROIC of around 17%, and a limited, temporary impact on the CET1 capital ratio.
• **Customers**: The combined entity will increase its capacity to finance businesses and households by an additional 5.4 billion euros per year.
• **SMEs and Self-employed**: Will benefit from guarantees to maintain future credit volumes, reflecting BBVA's firm support.
• **Employees**: Will be part of a stronger, larger bank with greater scale, addressing industry challenges.
• **Society as a whole**: Benefits from a more robust financial institution with increased capacity to support economic activity.

Next Steps

• The Spanish National Securities Market Commission (CNMV) must approve the corresponding supplement with the improved offer.
• Once approved by the CNMV, the take-up period for the offer will resume for the remaining days until the completion of the 30-day period.
• BBVA's announced 1 billion euro share buyback is expected to be executed post-closing of the voluntary tender offer.
• Capital generated from the TSB sale and the extraordinary dividend is expected to be reinvested in shares of the combined entity.

Key Dates

Recommendation

The significantly improved offer for Banco Sabadell shareholders, including a 10% increase, a valuation at a decade-high, and tax-neutral share consideration, makes accepting the tender offer highly attractive. For BBVA, the transaction is projected to be accretive to EPS from the first year with a high return on investment and limited capital impact, strengthening its strategic position in the European banking sector. The waiver of further improvements and extensions indicates this is likely the final, best offer, making it a compelling opportunity for Banco Sabadell shareholders to tender their shares and for investors to consider the combined entity's future prospects.

Keywords

BBVA, Banco Sabadell, Merger, Acquisition, Tender Offer, Banking, Financial Services, Spain, Share Exchange, Tax Neutrality, EPS Accretion, Capital Ratio, Synergies, Corporate Governance, European Banking