The Spanish Banking Showdown: Why Sabadell's Shares Are a Risky Gamble – and BBVA's Play Is Smarter Than You Think

The battle for Spain's banking crown is heating up. BBVA's hostile takeover bid for Banco Sabadell has become a flashpoint for the clash between government intervention and market-driven consolidation in European finance. While BBVA bets on scale and synergies to dominate Spain's banking sector, Spain's government has thrown down the gauntlet—threatening to block the deal on antitrust and public interest grounds. For investors, this is a high-stakes moment: Sabadell's shares are a prime shorting opportunity, while BBVA's strategic resilience could position it to win even if the merger falters.

The Government's Veto Threat: A Regional Power Play

The Spanish government's opposition to the BBVA-Sabadell merger isn't just about competition—it's about political control over Spain's economic arteries. The National Markets and Competition Commission (CNMC) approved the deal in April 2025, but only after extracting steep concessions:
- Branch retention: BBVA must keep Sabadell's 300 branches in underserved regions until Q2 2025, then divest 213 branches afterward.
- SME lending safeguards: Competitive terms for small businesses must stay in place for at least three years.

But the Economy Ministry's final say looms large. By mid-August ontvangen, the ministry could escalate the review to the Council of Ministers, adding a “public interest” lens that could demand even more concessions—or outright block the deal. Regional leaders in Catalonia and Valencia are already lobbying fiercely, citing fears of reduced credit access for SMEs (projected to drop by €70 billion post-merger) and job losses.

Sabadell's Vulnerability: A Stock Price Trapped in Limbo

Sabadell's shares are a time bomb for investors. Despite BBVA's 30% premium over its April 2024 price, the stock has stagnated near €2.6 billion, reflecting skepticism about the merger's viability. Here's why shorting Sabadell is compelling:

1. Political Risk Overhang: The government's antitrust concerns could force BBVA to walk away or renegotiate terms, crushing Sabadell's valuation.
2. Strategic Overvaluation: Sabadell's board and retail shareholders argue the offer undervalues its standalone potential. But without the merger, Sabadell's fragile balance sheet—reliant on TSB's 14% profit contribution—leaves it vulnerable to market fluctuations.
3. Regulatory Gridlock: Even if the merger proceeds, Sabadell shareholders must wait until Q4 2025 for BBVA to secure over 50% of voting rights. Delays or regulatory pushbacks could trigger a sell-off.

BBVA's Play: Betting on Scale and Resilience

While Sabadell's stock flounders, BBVA is positioning itself as the winner in any scenario:

• Capital Strength: BBVA's shareholders approved a capital increase with 97.6% support, ensuring it can absorb Sabadell without diluting its CET1 ratio. Even if the merger fails, BBVA retains the financial flexibility to pursue other growth avenues.
• Synergy Dominance: The €850 million in projected synergies—driven by branch closures (300 locations), IT integration, and workforce reductions—give BBVA a cost leadership edge.
• Regulatory Compliance: BBVA's adherence to CNMC conditions (e.g., maintaining branch networks in low-income areas) signals its willingness to navigate political minefields, which could pay off if the merger survives.

Regulatory Hurdles and Market Forces: The TSB Wild Card

The merger's success hinges on two critical risks:
1. TSB Sale: Sabadell's UK subsidiary must be sold to meet regulatory divestment demands. A delayed or underwhelming sale could force BBVA to backtrack.
2. Branch Closure Costs: While BBVA plans to cut 300 branches, execution delays or union pushback could eat into synergies.

Yet these risks are priced into BBVA's valuation. If the merger succeeds, BBVA becomes Spain's second-largest lender, with €1 trillion in assets and enhanced cross-border reach. If it fails, BBVA's capital cushion allows it to pivot—while Sabadell faces existential questions.

The Investment Thesis: Short Sabadell, Long BBVA

Sabadell's shares are a short squeeze waiting to happen. With the government's deadline approaching and political winds shifting, the stock is prone to sharp declines if the merger stalls. Meanwhile, BBVA's strategic depth and regulatory agility make it a buy for long-term growth in European banking consolidation.

• Short Sabadell: Target a 20% downside from current levels if the merger is blocked or delayed.
• Buy BBVA: Aim for a 15% upside as the market prices in merger certainty or BBVA's standalone resilience.

Risks and Timeline: August's Deadline is the Catalyst

• August 2025: The Economy Ministry's final decision is due. If blocked, Sabadell's shares could plummet 30%. If approved, BBVA's stock rallies.
• TSB Sale Deadline: By Q4 2025, BBVA must secure a buyer for TSB. A failure here could reignite regulatory scrutiny.

Conclusion: Act Before the Government Speaks

The BBVA-Sabadell saga is a masterclass in political risk vs. market logic. Spain's government may delay or dilute the merger, but BBVA's strategic bets and capital strength make it the ultimate survivor. Investors who short Sabadell now and buy BBVA ahead of the August deadline will position themselves to profit from this tectonic shift in European banking.

The clock is ticking—act before the government's verdict reshapes the sector forever.