Spanish institution Banco Sabadell (SAB.MC) agrees to pay £1.7 bn for TSB (TSB.L), Britain’s seventh biggest lender with 631 branches and 4.3% market share, in one of the biggest cross-border banking deals since the financial crisis. Formally announced on March 12, the deal was also welcomed by the UK Treasury as “a vote of confidence in Britain’s economy”. Sabadell had begun to consider the possibility of a bid for TSB in January 2015 and is said to have approached TSB Chairman Will Samuel on February 27.
Industry Overview
More than ten years after the acquisition of Abbey National by Banco Santander, we see another Spanish bank chasing a British lender in the first important cross-border deal in the banking sector after the financial crisis. In the last years it has been clear that British banks are attractive targets for foreign banks, desiring to grow by expanding their international footprint. In particular, Santander, has been eager to construct a solid UK presence through acquisitions (Abbey National in 2004, Bradford & Bingley and Alliance & Leicester in 2008) in order to compete with the historical Big 4 British banks (Barclays, RBS, HSBC, Lloyds) and it is having some success in so. Many think that Banco Sabadell has similar goals and likely future targets would be Scottish lender Clydesdale Bank (up for sale by its owner National Australia Bank) and OneSavings (formally looking for a buyer). However, regional Banco Sabadell is not comparable to a global bank such as Santander, and this is particularly true regarding funding needs and capabilities: this sort of capital rationing is likely to hold it back from embarking soon in further acquisitions.
The Trustee Savings Banks trace their origins in early financial institutions created back in 1810 with the purpose to accept savings from the lower classes, and it grew until the eighties, when they were all amalgamated into a single institution named TSB Group, subsequently quoted on the London Stock Exchange. In 1995, the TSB merged with Lloyds Bank to form Lloyds TSB, one of the two largest British bank at the time. After the Lehman collapse, Lloyds TSB rescued HBOS and renamed itself Lloyds Banking Group, and few months later it received the UK bank rescue package, resulting in HM Government owning a 43.4% stake in the group. In order to comply with European Union Regulations about state aids in private sectors, the group has been forced to spin off a part of its business: in order to do so, the TSB brand has been resurrected. The new TSB business consists of all Lloyds TSB branches in Scotland, plus Cheltenham & Gloucester branches. Although there had been a provisional agreement to sell the Lloyds TSB Scotland business to Co-operative Banking Group in early 2013, it all came to nothing since Lloyds decided to divest it through a stock market floatation. The new TSB standalone is the seventh biggest lender in the UK with 631 branches and a 4.3% market share.
Banco Sabadell is a commercial bank established in 1881, in Sabadell, a town near Barcelona (Spain), and now it is the fifth-largest Spanish banking group. Starting from 1996 Sabadell has undertaken an ambitious expansion project, carried out mainly through the integration of smaller competitors, in order to abandon its status of regional bank and become a national player. In parallel to this process, in 2001 Sabadell went public in Madrid stock exchange and in 2004 it became a member of the IBEX 35. Nowadays Banco Sabadell continues craving growth and international expansion; the bank’s CEO Josep Oliu believes in achieving this by exploiting the interesting opportunities and above-average margins characterising the UK retail banking sector, and TSB in particular.
Transaction Drivers
Sabadell’s internationalization strategy – possibly due to subdued home markets not allowing for appealing growth-prospects for mid-sized banks – is the key driver of the deal. The bank currently has operations in the US, as well as branches in southern France and Morocco. Additionally, Sabadell is currently waiting for a full banking license in Mexico.
The internationalization rationale is confirmed by the words of Josep Creus, Sabadell’s chairman, who commented on the attractive strength of British economy and its healthy profit margins. “We can help them execute growth plans with much more success than on their own … [TSB] will become a much more serious challenger in the UK market”, he added.
As the fifth largest bank in the Spanish market, the deal is seen by Sabadell as a way to expand its operations, while at the same time gain a position to challenge the big four UK lenders (Barclays, HSBC, RBS and Lloyds itself). Both parties share optimism on the growth prospects of the combined entity, as reflected in the words of TSB Chief Executive Paul Pester, who believes that “Sabadell would help TSB get into small business banking, while supporting its existing retail banking business and helping to bring competition to the UK market”.
The key determinants of future growth have been summarized by Creus in another public statement, affirming: “We believe our experience of growing small business lending, our commitment to innovation and our resilient and tested IT platform will speed up TSB’s expansion”. It is precisely this point – the IT platform – however, that has raised concerns from analysts. Cost savings have been estimated at about £160 mn (annually) after the third year of implementation, but the flipside of the coin is the risk involved in such a transition, which might go less than perfectly smoothly. Lloyds, who currently provides IT services to TSB, is already committed to paying £450 mn to help migrate TSB to a new platform.
Terms and Structure
Spanish giant Banco Sabadell agrees to pay £1.7 bn in cash to take over TSB. Lloyds Banking Group still owns 50% of TSB after selling shares to the public last year. When completed, the takeover would allow Lloyds to exit its remaining holding in TSB by the end of 2015, a deadline set by European regulators in return for approving its £20 bn government bailout during the financial crisis. This deal will therefore be a “significant and positive step” to meet the group commitment with the European Commission, as Lloyds chief executive Antonio Horta-Osorio recently stressed.
Lloyds has agreed to sell a 10% stake in TSB to Sabadell and has given an irrevocable undertaking to offload its remaining 40% holding. The British banking group, which is providing TSB’s technology platform under a 10 year deal at £100m per year, an amount due to double in 2017, will also hand out £450 mn to Sabadell in order to transfer the IT system to the Spanish bank. Moreover, concerns over potential job losses were suddenly played down.
As soon as the takeover became public, TSB’s shares rose 23.48% from around 264 p to 326.1 p on March 12. TSB is now traded in the region of 335 p as of April 13. The bid price (340 p per share) represents a 31% premium for TSB shareholders, and it is roughly 18% above the price TSB was floated at in 2014.
Meanwhile, shares in Sabadell were suspended on March 12 and lost 10% overall in the announcement week, with investors predicting that the bank would need a capital increase to fund the cash takeover. In the following days, Sabadell stock prices recovered by nearly 5% confirming positive feelings over the deal.
Sabadell is funding the deal via a €1.6 bn capital increase, issuing new shares for €1.48 per share in a proportion of 3 new shares for each 11 old ones.
Citigroup and Rothschild are acting as financial advisors to TSB and Goldman Sachs is acting as financial advisor to Sabadell.
To contact the authors:
Adele Bertolino adele.bertolino@studbocconi.it
Alessandro Caiumi alessandro.caiumi@studbocconi.it
Giulio Giacomo Coperti giulio.coperti@studbocconi.it
Giulio Tanzi giulio.tanzi@studbocconi.it
Steven Suskauer steven.suskauer@studbocconi.it
To contact the editor responsible for this article:
Steven Suskauer steven.suskauer@studbocconi.it
Bocconi Students M&A Circle 
You must be logged in to post a comment.