By Hannah Farrell, Liam Smith, Liam Ryan (TCD), and Shivaum Bapu, Patrick Gorton, Daniel Winsor, Nicole Phung, Pristie Sharma, Gurneek Gill (UCL)
Overview of the deal
Estimated Value: €4.5bn
Expected close date: Q1 2021
Acquirer advisor: Morgan Stanley
Target advisor: Rothschild
Amidst the increasing pressure on European banks to consolidate given rising bad debts and record-low interest rates, an all-share merger, by absorption, of Bankia by CaixaBank, has been announced. CaixaBank will exchange 0.6845 of its new ordinary shares for one Bankia share, which is a 20% premium over the exchange ratio at the closing on September 3rd, before news of merger talks came out. The transaction values Bankia at €1.41 per share, which is slightly lower than the September 17th close of €1.44.
This will create Spain’s largest domestic bank, with 25% of the market share in loans, 24% in deposits, and 29% in long-term savings products. The combined entity, which will maintain the CaixaBank brand, has a market capitalisation of almost €17bn and will have assets worth more than €650bn, putting it in a much better position to deal with the more complex environment that is anticipated due to the pandemic. Through greater scale, financial strength, and profitability, alongside a more balanced and diversified geographical presence, the joint company aims to improve services to customers, increase value for shareholders and provide greater support to Spain in its economic recovery.
“We will become the leading Spanish bank at a time when it is more necessary than ever…” – Bankia Executive Chairman Jose Ignacio Goirigolzarri
Company Details: Acquirer - Caixabank
CaixaBank is a Spanish integrated financial group. The group offers traditional banking services, as well as portfolio management, insurance, investment advisory, international banking, and other specialist financial services. It is currently Spain’s third-largest banking vender by market value and has the most extensive branch network in the Spanish market, serving over 15 million customers. CaixaBank was formed following the restructuring of Spanish banking firm La Caixa – a move which saw CaixaBank retain the banking and insurance activities of La Caixa group, as well as stakes in oil and gas firm Repsol and telecommunications company Telefónica, on top of holdings in several other financial institutions.
Founded in 2011, headquartered in Valencia, Spain
CEO: Gonzalo Gortázar
Number of employees: 35,589
Market Cap: €11.1 billion as of 27/09/2020
LTM Revenue: €8.96 billion
Company Details: Bankia
Listed on the Madrid stock exchange, Bankia is the 4th largest financial entity in Spain with over €170bn in assets. It was formed by the union of 7 Spanish savings banks in December of 2010 and offers a universal suite of banking services, including divisions in: Retail, Private and Business Banking, as well as Bancassurance, Asset Management and Real Estate Assets. The bank was also partially nationalised due to its near-collapse in the spring of 2012 but now reaches almost 8 million customers.
Founded in 2010, headquartered in Madrid, Spain
CEO: José Sevilla Álvarez
Number of employees: 15,950
Market Cap: €3.9 bn (as of 25/09/2020)
EV: €5.9 bn
LTM Revenue: €2.3 bn
LTM EBITDA: €0.8 bn
LTM EV/Revenue: 2.5x
LTM EV/EBITDA: 7.4x
Projections and Assumptions
The merger will create Spain’s largest domestic bank, beating out Santander and BBVA, this will sure up the bank’s future for the upcoming year by lowering costs and improving overall efficiency. This consolidation will reassure stakeholders during a time where bank loan defaults continue to rise as a result of pandemic pressures.
With a reassuring reaction from the stock market, Bankia’s share price has risen by approximately 20% since news of the merger was first announced. CaixaBank, whose share price initially rose as much as 15%, now sits at a 1% gain in share price. The merger appears favourable for all parties as CaixaBank will pay 0.6845 of its shares for each Bankia share, giving Bankia shareholders a small premium and CaixaBank access to Bankia’s estimated 1.9 billion of estimated excess capital, which will help strengthen its balance sheet in uncertain times.
Short term increases in revenue from the merger will be realised as a result of expanding CaixaBank’s existing profitable insurance business to Bankia’s customer base, primarily located in big cities like Madrid and Valencia. On the other hand, CaixaBank’s customer base is primarily located in the Catalonia region of Spain, with its head office previously being located there. There could be potential problems for the newly merged entity in retaining all customers from both sides. With regard to retail banking, membership of a specific bank is often an important signifier of the region you are from, with many people valuing the decentralisation of the banks. For the people of Spain, who are particularly conscious and proud of regional affiliations, it remains to be seen if those that were previously customers of Bankia, or CaixaBank, will be as eager to stay with the new entity that will operate under the CaixaBank name.
There was reasonable consensus from inside both banks that the deal would presumably go ahead, and not face any severe competition hurdles. However, it may not be as easy as first thought. Catalonia’s vice-president and minister for the economy has already been quoted on his issues with the deal, citing the removal of jobs from Catalonia and the reduction of competition for consumers as potential issues for the merger. As the reality of the thousands of potential job losses hits home to employees and politicians it is likely that this merger will be met with more obstacles.
In the long-run, CaixaBank’s strong roots in the regional economic hub of Catalonia would propel it to consolidate presence into Madrid’s corporate and consumer base. From there, it would be in a better position to tackle big players like Santander and Bilbao Vizcaya Argentaria. Furthermore, this merger might cause other lenders in Spain to consider their role in further consolidation in the field.
On a national level, a likely consolidation of the Spanish banking system can be said to be comparable to that observed on average in the euro area, following two successive waves of consolidation between 2008-2009 and 2012-2013 where CaixaBank and Bankia emerged from.
On a European level, this could lead to a consolidation in banking in Southern Europe if not beyond that. In fact, not long after the merger, on 22 September, Credit Suisse CEO voiced his opinion that he expects further consolidation in the region. A higher concentration of consolidation is one that the European Central Bank has been in favour of for a few years. Consolidation serves as a means to improve the financial profitability and resilience of banks on a macro scale.
In summary, CaixaBank and Bankia’s strategy is a classic one—combine forces, utilise strengths, and aim high. This strategy is likely to play out in their favour since the ECB encourages bank mergers and banking consolidation.
Risks and Uncertainties
The soon to be finalized merger between Bankia and Caixabank superficially looks to be a beneficial move for both companies, as well as for Spain as a whole. As mentioned above, the move would be an incredibly fruitful deal, from a liquidity and credit perspective - the main two types of risk that many banks are currently facing. However, a risk that both banks are taking on in this move is the direct effect it will have on their clients. With the merger keeping operations under the Caixabank brand, the ensuing closure of branches, offers, payment lines and changing account numbers are an unavoidable aspect of the transition. From a client perspective, the closing of a local branch or modification of any current interactions they have with one of the banks (mortgages, bank cards, funds, etc.), could be reason to look elsewhere for their banking needs. Consequently, the Adicae association, a Spanish financial issue institution, has requested the board of directors of both banks to ensure the protection of their clients in the merger. This request also indicates a commitment to arbitrating solutions for clients affected by this merger in an out-of-court format.
A smaller risk for the two banks is the domino effect that this deal could have on their rival banks in Spain, with many speculating that mergers in the banking sector could be set to spark in the near future. At the same time that the Bankia - Caixabank deal began to spark news, shares in rival banks such as Bankinter and Banco de Sabadell saw a rise alongside that of Bankia and Caixa. While mergers in this sector could be an extremely beneficial move for the Spanish economy in the future, especially amidst the Covid-19 global pandemic, it could prove to be detrimental to business for the soon to be merged Caixabank. If Caixabank is not thorough in their attempts to hold onto existing clients affected negatively by the merger, a large number of these clients could be seeking their banking needs fulfilled by a rival bank very soon.
“Getting married in difficult times makes it even more important that you choose the right partner,” – CaixaBank chief executive Gonzalo Gortázar