TSB confirms takeover bid from Spain's Banco Sabadell, Lloyds gives approval

Recently floated TSB has received a cash takeover approach from Spain's Banco Sabadell, which TSB's majority owner Lloyds said it would accept.

A preliminary bid at 340p per share has been tabled, the lender confirmed, 80p higher than its price at flotation last June.

Within minutes, shares in TSB, which are among the most heavily shorted in London, rocketed 26% higher to 333.32p.

Ironically, before today there had been some speculation in the market that TSB might be contemplating making its own bid for Aldermore.

The board of TSB has indicated to Sabadell that it would be willing to recommend an offer at the proposed price, subject to reaching agreement on the other terms and conditions of any offer.

TSB and Lloyds both said they would be willing to recommend an offer at the proposed price

With the Catalan bank's approach for TSB made "within the last two weeks" it has until 9 April to make a firm offer, under UK takeover rules.

Lloyds Banking Group, which still owns 50% of TSB after the inital public offer last June, said it was part of the discussions with Sabadell and "would be minded to accept an offer at this price if it is made", subject as well to agreement on the other conditions.

As part of the flotation last year Lloyds sold a 38.5% stake, before offloading a further 11.5% in September.

A NEAT SOLUTION FOR LLOYDS?

Mike van Dulken, head of research at Accendo Markets, noted that: "With Lloyds still holding a 50% stake in TSB it will have a deciding vote on any offer but with the UK government still holding around 23% in Lloyds itself it may also have a say in the matter given its aim of recouping its bailout investment.

"Could it demand that TSB holds out for more? Could this jeopardize any potential deal?" he wondered.

Analysts at Shore Capital said the bid would be a "neat solution" for Lloyds, which is required by regulators to sell the remaining stake before the end of 2015.

Although the proposal will be subject to due diligence by Sabadell before a formal offer is made, ShoreCap thinks there is little likelihood of the deal falling down from here and the chances of it falling foul of a shareholder vote is also unlikely.

"We suspect that regulatory approval will also be forthcoming. This leaves the possibility of a counter offer by a third party, but again we view this a being a low probability outcome given that TSB’s large domestic rivals will be unable to get involved."

Analysts at Investec welcomed the news, agreeing that the chances of a counter bid were low. They believed TSB had been trading at an artificially cheap price reflecting the overhang of Lloyds’ stake.

NO-ONE EXPECTS THE SPANISH ACQUISITION

Although the acquisition logic was agreed to be robust, Sabadell's shares shot off in the opposite direction to TSB's and were suspended by the market regulator after falling 7.52%, later reinstated and settling slightly higher.

In comments to our sister-site in Madrid Bolsamania, Nuria Álvarez from the Spanish broker Renta 4 pointed out that the €4bn offer is "equivalent to 25% of Sabadell's market capitalization, and that if the Spanish bank wants to fund the offer in cash, a capital hike will probably be necessary.

"It is a very high amount, and if a capital increase is required, the share dilution will be discounted in the stock price".

Self Bank analyst Victoria Torre told Digital Look that it looked like a positive move for the Spanish bank because the purchase would make Sabadell the sixth largest financial institution in UK.

“Banco Sabadell hopes to finance the operation in a way that will have the smallest impact on its capital, but it definitely looks like there will need to be a serious share issue,” Torre said. “That's what is causing the plunge in the Spanish bank's shares."

The Spanish bank's reasoning was praised by Dr Kebin Ma, assistant professor of finance and banking at Warwick Business School in the UK.

"Sabadell faces the risk that the Spanish economy will remain sluggish for a prolonged period. The bank is not as diversified as Spanish rival Santander, and the acquisition of TSB should certainly help it achieve better diversification.

"Also TSB's business is mainly retail-based, which is robust and does not come with too many complications."

For their part, in an afternoon report e-mailed to clients analysts at Morgan Stanley chipped in: "SAB offer for TSB could have an ROI of 10% 2017/18E post cost synergies on our numbers, however we believe strategically its a high risk transaction given IT platform migration needed. From a capital perspective the deal would consume 150-200bp CET1, which we believe SAB would need to raise."