BBVA's Sabadell Takeover: A Regulatory Balancing Act with Implications for Spain's Banking Landscape

The Spanish National Commission on Markets and Competition (CNMC) is poised to approve BBVA’s €12.3 billion hostile bid for Banco Sabadell, but only after imposing stringent remedies to address competition concerns. The decision, expected as early as May 2025, marks a pivotal moment for Spain’s banking sector, as the merger would create a €1 trillion financial giant. However, the path forward remains fraught with regulatory hurdles, shareholder skepticism, and lingering economic uncertainties.

The Regulatory Compromise: Remedies to Preserve Competition

The CNMC’s approval hinges on BBVA’s compliance with “unprecedented” remedies designed to mitigate market dominance in key regions like Catalonia and Valencia, where the merged entity’s retail banking market share exceeds 30%. The agreed terms include:
1. Maintaining lending conditions: BBVA must preserve existing credit terms for SMEs and self-employed individuals in dominant markets for three years.
2. Extended credit support: Sabadell’s SME clients will receive working capital lines of three years, up from 18 months.
3. Credit volume guarantees: BBVA commits to retaining the credit volume for SMEs reliant solely on either bank for financing.

While these behavioral remedies aim to protect competition, Sabadell’s board has criticized them as insufficient, arguing structural measures—such as selling branches—are needed. The CNMC’s Phase II investigation, which could extend approval timelines into late 2025, may yet impose further conditions.

Deal Terms: Financial Incentives and Shareholder Dynamics

The transaction’s economics are compelling but complex. The initial exchange ratio of 1 BBVA share for every 4.83 Sabadell shares was revised post-dividend payments to 1 BBVA share for every 5.0196 Sabadell shares, plus a €0.29 cash payment per share. This adjustment reflects BBVA’s €0.29 dividend and Sabadell’s €0.08 payout in late 2024.

The offer represents a 30% premium over Sabadell’s April 2024 share price, rising to 50% when compared to a 90-day average. Analysts project synergies of €850 million, driving a 27% EPS boost for Sabadell shareholders by 2026 and a 10% EPS increase for BBVA shareholders by the third year. However, Sabadell’s board rejection and the Spanish government’s opposition—though legally powerless to block—add political and reputational risks.

Regulatory and Operational Challenges Ahead

The CNMC’s approval is conditional on BBVA’s adherence to remedies, but deeper regulatory scrutiny looms. The European Commission is reviewing the merger under its Foreign Subsidies Regulation (FSR), with a decision deadline of November 26, 2024. A prior requirement to divest 513 branches—300 of which were sold to CaixaBank by early 2024—was extended to Q2 2025 due to buyer negotiation delays. Failure to meet this deadline could trigger penalties or even unwind the deal.

BBVA also faces operational challenges, including reducing Sabadell’s board size post-merger and maintaining regional brand presence in Catalonia, where Sabadell has strong ties.

Market and Economic Risks

1. Interest Rate Environment: Low rates persist in Spain, squeezing bank margins. The merged entity’s scale may help offset this pressure, but prolonged stagnation could delay synergy realization.
2. Economic Downturn: Spain’s economy is projected to grow just 1.3% in 2025, per the IMF. A slowdown could reduce loan demand and increase non-performing assets.
3. Shareholder Approval: While Sabadell’s board opposes the deal, shareholders—not directors—hold the final vote. The 30% premium and synergies may sway them, but prolonged uncertainty could erode confidence.

Conclusion: A High-Reward, High-Risk Gamble

BBVA’s Sabadell acquisition offers transformative potential: a €1 trillion banking powerhouse with €850 million in synergies and a 27% EPS boost for Sabadell shareholders. However, execution risks—regulatory delays, branch divestiture hurdles, and shareholder skepticism—could derail the deal.

Investors should monitor three critical metrics:
1. Regulatory Timelines: CNMC’s Phase II outcome and the EC’s FSR decision by late 2024.
2. Branch Divestiture Progress: Completion of the remaining 213 branch sales by Q2 2025.
3. Shareholder Sentiment: Sabadell’s shareholder vote, which could face pressure if the CNMC’s remedies are perceived as weakening BBVA’s value proposition.

Historically, Spanish banking mergers face prolonged scrutiny—Caixabank’s 2021 acquisition of Bankia took 10 months. If BBVA navigates these hurdles, the merged entity could dominate Spain’s retail and SME markets. Failure, however, would leave both banks exposed to fragmentation and declining profitability. For now, the scales tip toward approval, but investors must weigh the risks of regulatory overreach against the strategic upside of consolidation.

In a sector where scale increasingly matters, the BBVA-Sabadell deal is a high-stakes bet—one that could redefine Spain’s banking landscape for decades.