By Jesús Aguado
MADRID (Reuters) -BBVA's plans to rebalance its business towards Spain have suffered a setback after Sabadell rejected its takeover proposal, with analysts divided on Tuesday on whether the bank might return with better terms or look elsewhere.
Sabadell's board said late on Monday that BBVA (BME:BBVA)'s all-share offer - unveiled last week and valuing Spain's No.4 lender at about 12 billion euros ($12.9 billion) - significantly undervalued its potential and growth prospects.
BBVA, Spain's No.2 bank by market value, said it regretted Sabadell board's decision, which comes nearly four years after previous negotiations for a merger collapsed.
BBVA could now walk away, sweeten its offer, or launch a hostile bid. A spokesperson declined to comment on the next steps or when the bank's board would meet.
A top 20 BBVA shareholder told Reuters that the offer was "extremely generous" and there seemed to be "little room for a meeting of minds," making the most likely option that BBVA backs away.
"There is little sense in BBVA going hostile - they do not need to buy Sabadell, and certainly not at the offered price and would risk franchise damage to themselves and Sabadell if they were to do so. Discipline is always a virtue, especially in banking," the shareholder said on condition of anonymity.
Flush with cash as higher interest rates boost bank profits across Europe, BBVA hoped a deal with Sabadell would rebalance its business away from emerging markets while creating one of the euro zone's biggest lenders by market value.
Investors seemed unconvinced, with BBVA's shares falling after its bid proposal and Sabadell's holding well below the suggested price.
On Tuesday, BBVA shares closed up 3.6%, while Sabadell's fell 0.45%.
Citi analysts said Sabadell's statement suggested its board could be looking for a cash component.
"BBVA's capital position leaves room to improve the offer by adding cash but management has struggled so far to convince investors of the transaction's merit," they said.
BBVA has about 3.1 billion euros of excess capital.
Spanish broker Alantra said it did not expect BBVA to go hostile, or switch to a cash bid, because it had proposed a friendly merger.
Around half of Sabadell shareholders are retail investors, and Alantra said these would largely follow the board's recommendation.
RBC Capital said BBVA would likely have some wiggle room on price and "Sabadell has probably not fully closed the door to future negotiations, although the two parties currently seem a long way away from finding middle ground".
BBVA Chairman Carlos Torres said on Tuesday the bank remained committed to its top market Mexico, announcing that BBVA's investments there would reach 81.4 billion pesos ($4.8 billion) between 2019 and 2024, above the 63 billion pesos previously envisaged.
OTHER DEALS?
Some analysts reckon BBVA could pursue other smaller lenders in Spain.
"BBVA has more options on the table for growth in Spain and could look to Bankinter or Unicaja as future targets if it withdraws from this move," XTB's Manuel Pinto said.
Banks in Spain, and southern Europe generally, have outperformed their northern counterparts over the last two quarters, supported by a more robust economy, Pinto added.
BBVA last week proposed offering one newly issued BBVA share for every 4.83 Sabadell shares, a 30% premium to Sabadell's closing price on April 29. Sabadell shareholders would get a 16% stake in the combined group.
A subsequent rise in Sabadell's shares and a fall in BBVA's meant that by Monday's close, before Sabadell's rejection, the proposed deal valued Sabadell at around 11 billion euros.
($1 = 0.9291 euros)
($1 = 16.8524 Mexican pesos)