On Friday (March 20), Spanish banking group Banco Sabadell announced that it had reached an agreement to acquire UK high street bank TSB, sparking talk of a potential wave of M&A activity.
The cash offer of 340p ($5.60) per share represents a premium of 30% on the June 2014 flotation price of 260p ($4.28) and a slight premium on the current share price of 333p ($5.48). The advantages for all parties are clear.
For its part, Banco Sabadell is prepared to pay a premium for what it sees as growth opportunities overseas. It is Spain’s fifth largest banking group, but growth prospects and interest margins in the Spanish banking sector remain low and so Sabadell is being forced to look elsewhere for expansion. Upon announcing the deal, Chairman Josep Oliu Creus stated “We see the UK as an attractive market with a strong regulatory framework, sound macroeconomic fundamentals and exciting prospects for growth.” Sabadell has pledged to continue supporting small business in the UK and believes it can build TSB to a point where it is a genuine challenger to the established powers of Barclays, HSBC, Lloyds, and RBS.
Lloyds is the other major beneficiary of the sale. TSB was spun off from Lloyds and as a condition of receiving state aid in 2008, the latter faces an EU-mandated deadline of the end 2015 to sell its remaining 50% stake in TSB.
The deal announced on Friday will see Lloyds dispose of 10% of its stake as well as an “irrevocable undertaking” to sell the remainder to its Spanish counterpart. António Horta-Osório, chief executive of Lloyds, said it was a “significant and positive step for the group and will enable us to meet our commitments to the European Commission to sell TSB, well ahead of its mandated deadline.”
While it may signal poor prospects for the Spanish banking industry, Sabadell’s move also serves as a vote of confidence in the UK economy and has stirred talk of an M&A revival in Europe’s banking industry.
Since the financial crisis of 2008, cross-border banking M&A activity has been extremely limited within Europe and UK banks have been divesting in a bid to streamline. However, this is being interpreted by some analysts as the potential start of a wave of consolidation and Creus stated “It’s natural that there’s some consolidation.” The speed with which the deal came about (just 21 days passed between an exploratory phone call from Creus to TSB Chairman Will Samuel and Friday’s agreement) shows that the appetite is there if the deal is right.
It remains to be seen if an M&A wave will materialize, but if foreign banks are looking to the UK for growth, the likes of Triodos’ UK arm, Metro Bank, and Williams & Glyn, which is currently in the process of being carved out of RBS, would be likely targets.