Caution is the best part of the value of BBVA’s mergers and acquisitions. The bank has confirmed the negotiations for the acquisition of Sabadell. Even after the operation, Chief Carlos Torres will have plenty of capital to spare. Mexico, not Turkey, offers better opportunities for higher profits.
If Torres has something, it is light feet. On the same day that it agreed to sell BBVA’s US unit for 9,700 million euros (with a considerable premium compared to book value), the talks with Sabadell for the acquisition of the entity were confirmed.
A union would almost double BBVA’s market share in Spain to 20%, according to Morgan Stanley’s analysis. Furthermore, any price will be cheap: even after a 27% rise in the last five days due to rumors of an imminent offer, Sabadell’s shares are still trading at just a quarter of tangible book value.
And if BBVA manages to cut 42% of the costs of its objective, in line with the proposal to merge CaixaBank with Bankia, the net savings of 3,400 million euros in restructuring costs could amount to 6,300 million once taxed and capitalized.
Assuming that BBVA pays a fifth of the premium, valuing Sabadell’s equity at 2.9 billion euros, Torres would have a juicy Tier 1 ratio of ordinary capital of 13.1% after the American sale. That means 4.2 billion euros of excess capital above the 12% minimum threshold of CET1. If BBVA decided to dispose of Sabadell’s operations in the United Kingdom, that booty would be even greater.
Expanding into Turkey, which represents 16% of the BBVA group’s profits, is tempting. Shares of Garanti, the local bank in which Torres has a 49% stake, have fallen 22% this year. A one-quarter premium acquisition would cost 2.7 billion euros, leaving a good amount left over for Torres’s stated intention to buy back shares once regulators allow it.
Still, it would be better to use the cash in Mexico. BBVA already has 23% of the loan market. Deploying capital there, as its Spanish rival Santander does, would consolidate its leadership position. Furthermore, the return on equity there, from 24% last year, is roughly double that of Turkey.
BBVA shares fell 4.4% on Tuesday, as is often the case if investors are concerned about an onslaught of value-destroying M&A. Torres could reassure them by pointing out that Sabadell could be their last merger for a while.
The authors are columnists for Reuters Breakingviews. Opinions are yours. The translation, of Carlos Gómez Down, it is the responsibility of Five days