Explainer-BBVA's battle for Sabadell faces Spanish government decision

By Jesús Aguado

MADRID (Reuters) -The Spanish government is set to decide next week on whether to impose additional conditions on BBVA's 14 billion euro($16.23 billion) hostile bid for smaller rival Sabadell before giving it its approval.

Madrid, which has opposed the deal since it was announced in April last year because of fears over job losses, said last month that ministers would examine the offer, a rare move which drew a rebuke from the European Union.

The complex, lengthy process may act as a test whether European bank M&A deals, several of which were announced this year, can get over the line.

In the latest twist, Sabadell this week said it had received expressions of interest in its British unit, TSB, which analysts say could be a defensive move to ward off BBVA.

Below are some of the likely next steps in what would be Spain's second-biggest banking deal by assets.

WHAT HAPPENS NEXT?

The government has until June 26 to review the bid and is expected to do so at a June 24 cabinet meeting, considering broader "common interest" criteria beyond the Spanish competition watchdog's competition-focused approval.

Economy Minister Carlos Cuerpo has suggested that the government's concerns revolve around financial inclusion and territorial cohesion.

While the European Union has urged Madrid to honour the regulator's decision, Spain has the right to impose conditions related to national defence, public safety, or environmental protection.

HOW CAN THE 'COMMON INTEREST' CRITERIA BE APPLIED?

It is not entirely clear.

Financial advisory firm MKP Advisors says the law is vague enough to allow the government to effectively scupper the takeover, although it cannot actually stop BBVA from buying Sabadell shares.

BBVA Chairman Carlos Torres says Madrid can only uphold the conditions from the Spanish competition regulator, or even "soften" them. In a radio interview broadcast on Wednesday he also said BBVA had an option of challenging the government's decision in court or even accepting it and appealing it later.

However, Sabadell's CEO Cesar Gonzalez-Bueno reckons Madrid can impose harsher conditions on grounds of common interest.

SABADELL'S DEFENSE - SELLING TSB?

Sabadell has taken some steps to bolster its independence, increasing payouts for 2024 and 2025 as an incentive to keep shareholders on board.

Broker RBC said a potential sale of its British unit could also be seen as a defensive move since cashing in on TSB sale may have been part BBVA's calculations. By offloading the unit and distributing the proceeds to current shareholders, Sabadell could make itself less appealing as a target.

BBVA's Torres has said that the bank has accounted "a fairly high value" of TSB in its calculations for Sabadell's bid.

RBC analyst Pablo de la Torre Cuevas said that BBVA could still adjust its offer if the sale went through.

Converting interest in TSB into a sale will not be easy. Spanish legislation requires boards of target companies to remain passive and request shareholder approval before doing anything that might prevent an acquisition from succeeding.

IS A MERGER GUARANTEED?

No. Harsher measures could make BBVA walk away, which it has said is an option.

The stock market supervisor is waiting for the government's decision before approving the formal bid, which then BBVA would follow with a formal offer and Sabadell shareholders would have 30 to 70 days to tender their shares.

While the government can later block a full merger making the banks operate independently, BBVA could still aim to secure the majority of voting rights or 49.3% of Sabadell's capital. That would allow it to appoint new board members and try to integrate the bank at a later stage. In his June 18 interview, Torres said a deal without a full merger, while not a preferred outcome, would still make sense. He has previously said that would still allow BBVA to achieve most of the targeted cost savings.

Sabadell rejects that idea.

DO MARKETS EXPECT A TAKEOVER?

Judging by the performance of both banks' shares, investors seem to expect a deal with BBVA sweetening its offer, even though it has ruled it out.

It is unlikely BBVA will improve its offer until it reaches the bid acceptance period and technically it can do it until five days before it ends.

Sabadell's shares already trade above the original 30% premium BBVA offered over the closing price of Sabadell shares before the bid's announcement, and have since outperformed BBVA shares, now valuing the target bank at around 14 billion euros.

"The only explanation for it trading at a premium is that the market is still expecting a higher offer," said Nicolas Lopez, Singular Bank's head of equity research.

($1 = 0.9333 euros)

(Reporting by Jesús Aguado; Editing by Tommy Reggiori Wilkes and Tomasz Janowski)