Tuesday, November 24

The ins and outs of a hidden negotiation: the BBVA-Sabadell merger | Economy


Carlos Torres (BBVA) and Josep Oliu (Sabadell)
Carlos Torres (BBVA) and Josep Oliu (Sabadell)

The presidents of BBVA, Carlos Torres, and Sabadell, Josep Oliu, have played cat and mouse all year. The first meetings, held in Madrid, which some place in December 2019, were cold and at the initiative of Sabadell. But that game of poker was postponed and both players sat down again in July with worse cards and more haste. On November 16, after months of misleading journalists and analysts, they admitted that BBVA was negotiating to buy Sabadell. Now the difficult begins.

Why this change? The reasons are varied. January started with the pandemic in China, and the illusion that it would not reach Europe, but BBVA started the year with problems of its own: its fully loaded CET 1 capital ratio, the highest quality, fell one point and remained at the 10.8% in March, which caught the attention of analysts and investors, who further punished their shares on the stock market. All banks began to have a hard time, but BBVA lost one of its great shields, being the leader in capital among the big ones.

With the virus came the economic crisis, which anticipated a future boom in bad debts, as always happens, and was the second problem at Torres ‘table (and at all bankers’). And the pandemic ended up bringing a third headache: the spread of the virus around the world showed that, this time, the geographical diversification of BBVA’s businesses (Mexico and Turkey) was not going to be a protection, as it happened in the 2008 crisis. Furthermore, this situation prolonged negative interest rates for more than five years, so the banks entered their particular storm with low profitability and more capital than 10 years ago, but without selling all the toxic brick of the previous debacle. .

Losses arrive

Everyone’s shoes were tight, but more so to Sabadell, whose price has fallen by 63% in two years, despite the strong rise in recent days. In addition, the bank led by Oliu posted losses in the fourth quarter of 2019, which heralded a very dark 2020, especially since its British subsidiary, TSB, was still in the red and with serious problems.

In the blue bank the clouds also arrived: on April 30, it announced losses of 1,792 million due to the coronavirus provisions and the US business.

Against this background, the two presidents met again in July. Financial sources suggest that Torres should already have the sale of the Texas subsidiary underway and possibly some juicy informal offers on the table. In the end, he received $ 9.7 billion, a good deal for a bad deal.

Sabadell understood that BBVA was entering the game and in July hired the US giant Goldman Sachs to analyze the progress of the operation. After the summer, with the preliminary merger agreement between Bankia and CaixaBank in the press, the talks were extended to the CEOs, Onur Genç (BBVA) and Jaime Guardiola (Sabadell). Some sources say that there were even telematic contacts between executives of both banks. Information exchange began.

But now everything goes through two issues: arrive at a reasonable price and give Oliu a graceful exit. In the market, generosity is expected from BBVA, which could pay around 2,400 million, with a premium close to or greater than 30% of the average price of these three months. But you must also find a way out for Oliu on the council, and perhaps another position. There is talk of David Vegara, former Secretary of State with Zapatero. But if the price is high, the bank Torres heads may not be as generous.

One bank is better than two

The crisis and the efforts of the regulators make it increasingly difficult not to reach an agreement, say sources familiar with the operation. “The resulting bank would be more solvent, the most digital, with great command of the business business, with less expenses after reducing staff and closing offices, which means cost savings of about 500 million net, and with a bad will (fund of negative trade) of 7,700 million, which serves to finance the weight loss ”, points out a market analyst.

“Difficult times are coming and they both know that the merger would be more profitable than remaining apart,” adds an analyst. It should not be forgotten either that Torres (and BBVA, which is under investigation) weighs the judicial threat of the Villarejo case, which could complicate the situation.

The supervisors, both the ECB from Frankfurt, and the Bank of Spain, have encouraged this operation with impetus, making it clear that the last decision must be made by the managers. However, they showed that Sabadell can be a good destination for fortune obtained in the US: investing in developed countries is better than in emerging countries. Touch retraction.

BBVA sets the pace and its rival asserts itself

Sabadell knows about mergers: it accumulates more than 12, which makes it one of the greatest experts. And Josep Oliu, its president, is a great short negotiator. BBVA knows this, but is also aware that it can handle the times: it is in a more comfortable position, although not as much as it transmits to the market and the media.

The Catalan entity asserts its potential for improvement and wants to prevent BBVA from taking advantage of its bad moment.

According to sources familiar with the operation, the Catalan bank highlights the potential of its portfolio of SMEs after the pandemic, the 1.3 billion capital gains of the fixed income portfolio and the possibilities of its small bank in Mexico. The British subsidiary, TSB, has zero value in the market, but Sabadell has always defended that, once an agreement on Brexit is reached and after having fixed its technological systems, it will be an interesting player in London. Negotiation is about assessing expectations and realities. Everything is at stake.

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