European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

<ul>
<li>On 6 May, the Board of Sabadell rejected the merger proposal as "it significantly undervalues its growth prospects and is not aligned with the interests of its customers and shareholders".</li>
<li>BBVA could take the offer directly to Sabadell shareholders, but a hostile offer seems extremely unlikely and there are no precedents in the Spanish banking sector.</li>
<li>I find it unlikely that both parties reach an agreement because the terms would likely be unfavourable for BBVA (premium 40%-50%). Market sentiment also suggests a low probability.</li>
</ul>


On 6 May, the Board of Sabadell rejected the merger proposal as "it significantly undervalues its growth prospects and is not aligned with the interests of its customers and shareholders".
BBVA could take the offer directly to Sabadell shareholders, but a hostile offer seems extremely unlikely and there are no precedents in the Spanish banking sector.
I find it unlikely that both parties reach an agreement because the terms would likely be unfavourable for BBVA (premium 40%-50%). Market sentiment also suggests a low probability.


<div>
<div>
<a href="https://www.smartkarma.com/entities/banco-de-sabadell-sa" target="_blank" data-smartkarma-citation="entities:21295:1" rel="noopener"><strong>Banco De Sabadell SA (SAB SM)</strong></a><strong> refuses to sell TSB to Co-operative Bank for €1,200 million</strong>. Sabadell confirmed that it had received "<strong>an unsolicited show of interest</strong>" from the British retail bank Co-operative Bank for 100% of the capital of TSB, its UK subsidiary. The offer, according to Sky News exceeds £1,000 million. Sabadell confirmed in a statement that it had received a letter from Co-operative Bank in which a proposal for an offer by TSB was presented. However, Sabadell said its Board of Directors had officially responded to the Co-operative bank saying that "this is not a transaction that we wish to explore at this time, as we have previously publicly expressed."</div>
<div></div>
<p>The <strong>market is cautious about Sabadell, but less concerned about its solvency and asset quality</strong>. Sabadell has domestic exposure to SMEs, still vulnerable due to the Covid-19 crisis. Nevertheless, Sabadell is the best performer in the IBEX 35 this year, albeit it was penalized in 2020 due to the lack of visibility of its business, especially due to its subsidiary TSB and the possible impact of the crisis on bad debts. Sabadell bought TSB in 2015 for about 2.3 billion. TSB is mainly dedicated to mortgages (2% UK market share).</p>
</div>
<div>
<div>
<p>Management sticks to the strategy that began earlier this year after the arrival of César González-Bueno “TSB was one of the great doubts that weighed on the group, the market gave it a zero value, but from now on its contribution is going to be high. It will be one of the key elements of our profitability". A new three-year plan was launched in May, and the contribution of TSB is paramount to improve  profitability. After accumulating losses of €500 million during the last three years, the British subsidiary begins to bear fruit thanks to a strong restructuring of branches and staff. In the first six months of the current year, it contributed €39 million to the Group's profits.</p>
<p>Sabadell has set itself the objective of reaching a ROTE profitability of over 6% in 2023. The market trusts TSB's contribution to the group's profitability due to the growth of mortgages in the United Kingdom and the prospects for a rate hike by the Bank of England.</p>
<p>Interest in TSB had a positive effect on the shares of Sabadell, last Monday closed 2.75% higher, although the shares rose by more than 5% during the session. TSB has a favorable outlook and the rejection of the Co-op Bank offer confirms management's strategy. For this reason, <strong>a possible sale of TSB in the medium term is ruled out. Without the contribution of TSB, the profitability of the strategic plan would be difficult to obtain</strong>.</p>
</div>
<div>
<div>
<div>
<div>
<div>
<div>
<div>
<div>
<p><strong>Sabadell trades on 9.65x adjusted 2022e P/E and c. 0.36x PTBV</strong>. TP is €0.7/share (vs. a median Capital IQ consensus TP of €0.63), which represents a 7% upside.</p>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>



Banco De Sabadell SA (SAB SM) refuses to sell TSB to Co-operative Bank for €1,200 million. Sabadell confirmed that it had received "an unsolicited show of interest" from the British retail bank Co-operative Bank for 100% of the capital of TSB, its UK subsidiary. The offer, according to Sky News exceeds £1,000 million. Sabadell confirmed in a statement that it had received a letter from Co-operative Bank in which a proposal for an offer by TSB was presented. However, Sabadell said its Board of Directors had officially responded to the Co-operative bank saying that "this is not a transaction that we wish to explore at this time, as we have previously publicly expressed."

The market is cautious about Sabadell, but less concerned about its solvency and asset quality. Sabadell has domestic exposure to SMEs, still vulnerable due to the Covid-19 crisis. Nevertheless, Sabadell is the best performer in the IBEX 35 this year, albeit it was penalized in 2020 due to the lack of visibility of its business, especially due to its subsidiary TSB and the possible impact of the crisis on bad debts. Sabadell bought TSB in 2015 for about 2.3 billion. TSB is mainly dedicated to mortgages (2% UK market share).



Management sticks to the strategy that began earlier this year after the arrival of César González-Bueno “TSB was one of the great doubts that weighed on the group, the market gave it a zero value, but from now on its contribution is going to be high. It will be one of the key elements of our profitability". A new three-year plan was launched in May, and the contribution of TSB is paramount to improve  profitability. After accumulating losses of €500 million during the last three years, the British subsidiary begins to bear fruit thanks to a strong restructuring of branches and staff. In the first six months of the current year, it contributed €39 million to the Group's profits.
Sabadell has set itself the objective of reaching a ROTE profitability of over 6% in 2023. The market trusts TSB's contribution to the group's profitability due to the growth of mortgages in the United Kingdom and the prospects for a rate hike by the Bank of England.
Interest in TSB had a positive effect on the shares of Sabadell, last Monday closed 2.75% higher, although the shares rose by more than 5% during the session. TSB has a favorable outlook and the rejection of the Co-op Bank offer confirms management's strategy. For this reason, a possible sale of TSB in the medium term is ruled out. Without the contribution of TSB, the profitability of the strategic plan would be difficult to obtain.









Sabadell trades on 9.65x adjusted 2022e P/E and c. 0.36x PTBV. TP is €0.7/share (vs. a median Capital IQ consensus TP of €0.63), which represents a 7% upside.










Smartkarma Research Team, Smartkarma

Smartkarma Research

Smartkarma Research Team

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

<p>For our next Smartkarma Webinar, we have the pleasure of welcoming back Insight Provider <a href="https://www.smartkarma.com/profiles/jesus-rodriguez-aguilar" target="_blank" data-smartkarma-citation="accounts:5842" rel="noopener">Jesus Rodriguez Aguilar</a> to go over ideas in European Event-Driven. Jesus will examine offers that target FTSE 250 companies (particularly in healthcare and financial services); the real estate sector in Central and Eastern Europe; and special situations in European share classes and holding companies.</p>
<h3>The webinar was hosted on Wednesday, 16 June 2021, 17:00 SGT/HKT.<a href="https://share.hsforms.com/1H9pFZOB-RF2J00kbvMmxcw2c5gj?zoom_webinar_id=89974520966" target="_blank" rel="noopener"></a>
</h3>
<p>Watch the session here:</p>
<p><iframe src="https://www.youtube.com/embed/V5Kk8nkuLA8" width="560" height="315" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen="allowfullscreen"></iframe>Or subscribe to our podcast feed and listen on the go:</p>
<p><iframe src="https://open.spotify.com/embed/episode/34F1xaRo0opzAuBgwai2wy?utm_source=generator" width="100%" height="232" style="border-radius: 12px;" frameborder="0" allowfullscreen="allowfullscreen" allow="autoplay; clipboard-write; encrypted-media; fullscreen; picture-in-picture"></iframe></p>
<p>Jesus Rodriguez Aguilar is an Event-Driven Analyst looking across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations.</p>

For our next Smartkarma Webinar, we have the pleasure of welcoming back Insight Provider Jesus Rodriguez Aguilar to go over ideas in European Event-Driven. Jesus will examine offers that target FTSE 250 companies (particularly in healthcare and financial services); the real estate sector in Central and Eastern Europe; and special situations in European share classes and holding companies.
The webinar was hosted on Wednesday, 16 June 2021, 17:00 SGT/HKT.

Watch the session here:
Or subscribe to our podcast feed and listen on the go:

Jesus Rodriguez Aguilar is an Event-Driven Analyst looking across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations.

Smartkarma Webinar | European Event-Driven: Top Ideas

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

<ul>
<li>
<a href="https://www.smartkarma.com/entities/banco-bilbao-vizcaya-argentari" target="_blank" data-smartkarma-citation="entities:21251:1" rel="noopener">Banco Bilbao Vizcaya Argentari (BBVA SM)</a>  and <a href="https://www.smartkarma.com/entities/banco-de-sabadell-sa" target="_blank" data-smartkarma-citation="entities:21295:1" rel="noopener">Banco De Sabadell SA (SAB SM)</a> have broken off merger discussions</li>
<li>BBVA management can potentially deliver shareholder value through a potential share buyback, but plans o redeploy surplus capital in its core EM markets could increase perceived risk and limit the size of the buyback</li>
<li>Sabadell’s intentions to deliver improved returns, on a stand-alone basis, are, in our view, challenged by its lack of scale, the negative interest rate climate, as well as the TSB drag</li>
<li>Even after today’s sharp fall in the Sabadell share price, we would recommend a short on Sabadell shares – with no M&amp;A premium, Sabadell’s PBV ratio could fall back to close to 0.10x</li>
<li>Risks to our bearish view on Sabadell include finding buyer for TSB in the near term, as well as the potential for another domestic merger with either Liberbank or Unicaja</li>
</ul>



Banco Bilbao Vizcaya Argentari (BBVA SM)  and Banco De Sabadell SA (SAB SM) have broken off merger discussions
BBVA management can potentially deliver shareholder value through a potential share buyback, but plans o redeploy surplus capital in its core EM markets could increase perceived risk and limit the size of the buyback
Sabadell’s intentions to deliver improved returns, on a stand-alone basis, are, in our view, challenged by its lack of scale, the negative interest rate climate, as well as the TSB drag
Even after today’s sharp fall in the Sabadell share price, we would recommend a short on Sabadell shares – with no M&amp;A premium, Sabadell’s PBV ratio could fall back to close to 0.10x
Risks to our bearish view on Sabadell include finding buyer for TSB in the near term, as well as the potential for another domestic merger with either Liberbank or Unicaja


Merger Undone: Tougher Outlook for Sabadell, BBVA Plans Buybacks and EM M&A

<div>
<p><a href="https://www.smartkarma.com/entities/banco-de-sabadell-sa" target="_blank" data-smartkarma-citation="entities:21295:1" rel="noopener">Banco De Sabadell Sa (SAB SM)</a> 's (Sabadell) share price soared 24.59%  as investors discounted its acquisition by <a href="https://www.smartkarma.com/entities/banco-bilbao-vizcaya-argentari" target="_blank" data-smartkarma-citation="entities:21251:1" rel="noopener">Banco Bilbao Vizcaya Argentari (BBVA SM)</a> before the announcement, and Tuesday's earnings of the Sabadell share price indicate that the market discounts a 30% premium over Friday's price.</p>
<p>Hours after the deal announcement, BBVA confirmed that it is holding talks with representatives of Sabadell for a potential merger between the two entities, as confirmed to the National Securities Market Commission (CNMV) in a relevant event notice.</p>
<p>Now the situation has changed for BBVA, which is in the drivers seat due to both a recent share price boost (pre-sale to PNC) and the proceeds from the sale to PNC, which increase its capital levels. Therefore BBVA is opportunistically proceeding before a vaccine-based economic recovery and timing both the sale to PNC and a potential acquisition of Sabadell to simultaneously happen.</p>
</div>
<p>The new entity would be the second largest in the Spanish market with assets valued at €596 bn, just behind the new CaixaBank-Bankia, and far ahead of Santander, which would occupy the third position.</p>
<p>An integration with Sabadell would reduce BBVA's exposure to emerging markets, while Sabadell is in a highly vulnerable position (balance sheet and profitability, ROE 1.5%), two good reasons why I believe that this deal will go ahead.</p>
<p>The operation makes sense, especially for BBVA, because Sabadell has lost more than 60% of its market value YTD, while BBVA has fallen by half, at 30%. At the beginning of 2020, BBVA was worth 5x Sabadell whilst now it is 10x Sabadell.</p>
<p>From my calculations, a cash deal should be preferred by BBVA on an EPS basis: 20.4% higher EPS achieved through the integration of Sabadell on 2023, vs. 7.0% in a paper deal.</p>
<p>By acquiring Sabadell at a 40% premium, BBVA would be doing a very good business, especially after selling its bank in the US for 9.7 billion euros and taking over Sabadell for around €2.7 bn. BBVA could even afford paying north of a 50% premium.</p>
<p>Recommendation is <strong>LONG Sabadell, TP 0.476</strong> (8% spread to closing price on 18 November).</p>
<p>(<em>please read on for deal maths</em>)</p>


Banco De Sabadell Sa (SAB SM) 's (Sabadell) share price soared 24.59%  as investors discounted its acquisition by Banco Bilbao Vizcaya Argentari (BBVA SM) before the announcement, and Tuesday's earnings of the Sabadell share price indicate that the market discounts a 30% premium over Friday's price.
Hours after the deal announcement, BBVA confirmed that it is holding talks with representatives of Sabadell for a potential merger between the two entities, as confirmed to the National Securities Market Commission (CNMV) in a relevant event notice.
Now the situation has changed for BBVA, which is in the drivers seat due to both a recent share price boost (pre-sale to PNC) and the proceeds from the sale to PNC, which increase its capital levels. Therefore BBVA is opportunistically proceeding before a vaccine-based economic recovery and timing both the sale to PNC and a potential acquisition of Sabadell to simultaneously happen.

The new entity would be the second largest in the Spanish market with assets valued at €596 bn, just behind the new CaixaBank-Bankia, and far ahead of Santander, which would occupy the third position.
An integration with Sabadell would reduce BBVA's exposure to emerging markets, while Sabadell is in a highly vulnerable position (balance sheet and profitability, ROE 1.5%), two good reasons why I believe that this deal will go ahead.
The operation makes sense, especially for BBVA, because Sabadell has lost more than 60% of its market value YTD, while BBVA has fallen by half, at 30%. At the beginning of 2020, BBVA was worth 5x Sabadell whilst now it is 10x Sabadell.
From my calculations, a cash deal should be preferred by BBVA on an EPS basis: 20.4% higher EPS achieved through the integration of Sabadell on 2023, vs. 7.0% in a paper deal.
By acquiring Sabadell at a 40% premium, BBVA would be doing a very good business, especially after selling its bank in the US for 9.7 billion euros and taking over Sabadell for around €2.7 bn. BBVA could even afford paying north of a 50% premium.
Recommendation is LONG Sabadell, TP 0.476 (8% spread to closing price on 18 November).
(please read on for deal maths)

BBVA-Sabadell "Merger" Conversations, Deal Numbers

Spain

Banco de Sabadell SA attracts deposits and offers commercial banking services. The Bank offers mortgage, consumer, student, and building improvement loans, private banking services, and insurance, and sponsors Visa credit cards.  The Bank operates branches throughout Spain, elsewhere in Europe, the Caribbean, the Americas, and Asia.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Banco De Sabadell SA (SAB SM)

Hostile or Not?

Sabadell rejects merger proposal from BBVA, citing undervaluation and misalignment with interests. Hostile offer unlikely, agreement improbable...

Jesus Rodriguez Aguilar

Unlikely Disposal of TSB

TSB has a favorable outlook and the rejection of the Co-op's offer confirms management's strategy. A possible sale of TSB is ruled out. Without...

Jesus Rodriguez Aguilar

Smartkarma Webinar | European Event-Driven: Top Ideas

On 16 June, 5pm SGT, join us and Jesus Rodriguez Aguilar to go over top ideas in European Event-Driven, including offers that target FTSE 250...

Smartkarma Research

Merger Undone: Tougher Outlook for Sabadell, BBVA Plans Buybacks and EM M&A

Merger breakup equals the end of merger premium for Sabadell shares; despite the share price drop, it is challenged by its lack of scale, the...

Victor Galliano

BBVA-Sabadell "Merger" Conversations, Deal Numbers

By acquiring Sabadell at a 40% premium, BBVA would be doing a very good business, especially after selling its bank in the US for 9.7 billion euros...

Jesus Rodriguez Aguilar

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Hostile or Not?

​Sabadell rejects merger proposal from BBVA, citing undervaluation and misalignment with interests. Hostile offer unlikely, agreement improbable...

Jesus Rodriguez Aguilar

Unlikely Disposal of TSB

TSB has a favorable outlook and the rejection of the Co-op's offer confirms management's strategy. A possible sale of TSB is ruled out. Without...

Jesus Rodriguez Aguilar

Smartkarma Webinar | European Event-Driven: Top Ideas

On 16 June, 5pm SGT, join us and Jesus Rodriguez Aguilar to go over top ideas in European Event-Driven, including offers that target FTSE 250...

Smartkarma Research

Merger Undone: Tougher Outlook for Sabadell, BBVA Plans Buybacks and EM M&A

Merger breakup equals the end of merger premium for Sabadell shares; despite the share price drop, it is challenged by its lack of scale, the...

Victor Galliano

BBVA-Sabadell "Merger" Conversations, Deal Numbers

By acquiring Sabadell at a 40% premium, BBVA would be doing a very good business, especially after selling its bank in the US for 9.7 billion euros...

Jesus Rodriguez Aguilar

Sabadell rejects merger proposal from BBVA, citing undervaluation and misalignment with interests. Hostile offer unlikely, agreement improbable...