By Almaz Khabibullin (New York University Shanghai), Jorge San Roman (IE Madrid University), Helene Kapelari (Vienna University of Business and Economics), Jun Lee (Washington University in St. Louis) 09/25/2020
Overview of the deal
Acquirer: CaixaBank, S.A.
Target: Bankia
Estimated value: EUR 4.3 billion
Announcement date: 03.09.2020
Acquirer Advisors: Morgan Stanley
Target Advisors: Rothschild & Co.
After intensive negotiations, the boards of directors of the leading Spanish banks CaixaBank and Bankia gave the go-ahead for the merger on 18th September 2020. The transaction, which is expected to be closed in the first quarter of 2021, will create the new number one on the Spanish banking market, as the newly- formed giant has a total assets worth EUR 664 billion and more than 51.500 employees. The merged entity will maintain the brand name of CaixaBank and will serve more than 20 million customers. Following the merger, the bank will also profit from a strong position on a European level and form the tenth largest bank in the European Union. The potential deal was first announced on 3rd September 2020 and received very positive responses from investors. Share prices increased by 39 percent for Bankia and 13 percent for CaixaBank, which was understood as a significant indication that the market supports the transaction. However, before completion of the merger, the deal must be approved at the General Shareholder´s Meeting and by various regulatory and competition authorities.
The tie-up between CaixaBank and Bankia is in accordance with the general call for mergers by the European Central Bank. As a mitigative response to negative key interest rate and uncertainty about developments in the financial sector linked to the COVID-19 crisis, European banks are incentivised to consider mergers and identify cost synergies. Through the merger of the CaixaBank and Bankia, the banking landscape in Spain will be significantly impacted, as the pressure on Spanish competitors is now further amplified and the push towards consolidations will be strengthened.
“With this operation, we will become the leading Spanish bank at a time when it is more necessary than ever to create entities with a significant size, thus contributing to supporting the needs of families and companies, and to reinforcing the strength of the financial system.”
Jose Ignacio Goirigolzarri (Bankia Executive Chairman)
Company Details (CaixaBank)
CaixaBank SA is an integrated financial group, which provides banking and insurance services. It is Spain's third-largest lender by market value, after Banco Santander and BBVA. The firm offers banking business, insurance, pension and investment fund activities, as well as holdings in international banks. It operates through the following segments: Banking & Insurance, Equity Investments, and BPI. The Banking & Insurance segment core business includes the entire banking business, including retail banking, corporate banking, cash and markets, and the insurance business, primarily carried out in Spain through the branch network and the other complementary channels. It also offers life insurance, pension plans and general insurance products. The Equity Investment segment engages in the equity investment business. As of December 31, 2018, the company served its customers through 5,110 branches comprising 4,608 in Spain and 502 internationally.
Founded in 1904, headquartered in Valencia, Spain
Chief Executive Officer: Gortázar Rotaeche, Gonzalo
Number of employees: 35673
Market Capitalization: $12,72bn
EV: $66,51bn
LTM Revenue: $6,7bn
LTM EBIT Excl. Unusual Items: $2,82bn
LTM Market Cap/ Revenue: 1,6x
LTM Market Cap/EBT Excl. Unusual Items: 3,7x
LTM P/BV: 0,4x
Company Details (Bankia)
Bankia SA engages in the provision of financing and banking services. It operates through the following business areas: Retail Banking, Business Banking, and Corporate Centre. The Retail Banking business includes retail banking services provided to individuals, small businesses and the self-employed, applying a universal banking model. The Business Banking segment is divided into three main areas: Small and Medium Scale Banking, which focuses on small and medium enterprises; Corporate Banking, which provides banking services to enterprises; and Capital Markets, which provides trading in derivatives, financial advisory, loan and special finance origination, fixed-income origination and trading, and distribution of fixed-income products to the network. The Corporate Centre business includes the rest of the retail and business banking segments.
Founded in 2011, headquartered in Madrid, Spain
Executive Chairman of the Board: Goirigolzarri Tellaeche, Jose Ignacio
Chief Executive Officer: Álvarez, José Sevilla
Number of employees: 15947
Market Cap: $3,773bn
EV: $52,4bn
LTM Revenue: $2,196bn
LTM EBIT Excl. Unusual Items: $494mm
LTM Market Cap/ Revenue: 1,63x
LTM Market Cap/EBT Excl. Unusual Items:7,23x
LTM P/BV: 0,28x
Projections and assumptions
Short-term consequences
CaixaBank’s (CABK.MC) purchase and acquisition of state-backed Bankia is one of the biggest Spanish banking deals in the last two decades, making CaixaBank the largest lender in Spain by a sizable margin compared to the market. Although the deal is classified as a merger, it is essentially a takeover of Bankia by CaixaBank – they are 3x greater in market value and 2x as large in assets. As a result, other Spanish banks are growing keen on buying or joining rival banks to explore strategic options and be in a stronger position for cross-border deals. The merger also allows for CaixaBank to make significant annual cost cuts, resulting in increased revenue of about 1.1 billion (EUR). Together, the consolidated Spanish bank is expected to generate approximately 770 million (EUR) in cost synergies and within the next five years and is projected to reach an estimated annual revenue of 290 million (EUR).
The short-term consequences of the CaixaBank takeover are significant; there are a considerable number of job shutdowns and closing branches that come with the synergy. The main trade union Workers’ Commission (CCOO) has estimated over 51,000 staff to lose employment and approximately 6,300 branches to close in Spain.
On the other hand, with the profitability of Spanish banks at risk due to low interest rates, subdued credit demand, and increased regulatory costs, the merger has allowed for CaixaBank to dramatically reduce overcapacity and increase profits. CaixaBank, with connections deep throughout a thriving Catalonia, will be able to broaden their presence into the nation’s large consumer and economic structure. In doing so, the Spanish banks will be able to cut off punitive competition and recover from their slowly diminishing profitability.
“With this operation, we will form the principal Spanish franchise at a moment when it’s more necessary than ever to create entities with a critical size,”
Goirigolzarri (Current President of Bankia)
Long-term consequences
This acquisition projects to be the beginning of what has been denominated “a new era in the Spanish banking sector”, as the Spanish banking industry looks to quickly consolidate in order to mitigate the adverse effects of the coronavirus pandemic. This, in fact, has been the decisive factor behind this merger, which was once before proposed in 2012 albeit with an unsuccessful outcome (the situation for the banks then was not as dire as the current one, with analysts describing the rationale behind this deal as a “question of survival”).
Amongst an agonizing Spanish economy, other banks will be looking to swiftly follow CaixaBank and Bankia’s footsteps. Rumours include Santander acquiring Bankinter or a BBVA merger with Banco Sabadell, as these entities hope to remain on top of their competition (before the merger, BBVA and Santander ranked first and second respectively amongst Spanish financial institutions, with both now trailing the post-merger CaixaBank in terms of assets and market share). Altogether these banks already comprise 72.4% of all financial assets held nationally, with these figures only looking to increase as the industry consolidates further.
Experts in fact consider larger national banks acquiring smaller entities to be but the onset of an increasing trend, and one that could expand well beyond international frontiers; with Spanish banks merging with those from other European nations such as Italy (where the sector is highly fragmented), France or Germany (where banks are facing similar profitability issues). Many believe this will lead to a wave of mergers that will leave behind a highly concentrated future banking sector; namely a “handful of big players”. These larger institutions would be better equipped to deal with the pressures of increasing delinquency, negative interest rates or the threats posed by fintech.
Risks and uncertainties
Barring any unforeseen issues, the merger should go ahead as planned and be completed by Q1 2021. Both institutions’ boards have approved of this deal, which is now only waiting to be sanctioned by the “Ministerio de Asuntos Económicos” and “Comisión Nacional de Los Mercados y la Competencia”. The presence of left-wing populist party “Podemos” in the governing coalition has given rise to rumours that they could resist the deal, but no real opposition is expected as the case for an oligopoly between CaixaBank and the other 4 big Spanish banks has already been debunked (the flow and rates of credit are not projected to be altered as a result of this or any future mergers, and they are in fact expected to become more competitive).
Instead, the main issue facing this merger at this stage (albeit not significant) will be the backlash at the prospective loss of employment; 30%-40% of Bankia’s offices expect to be closed, and 5,000-15,000 jobs are to be cut as a result of redundancies. The headquarters, however, will remain unchanged as both banks are based in the city of Valencia; CaixaBank moved its offices from Barcelona to Valencia following the civil unrest that gripped the city in 2017, as the massive protests for independence after an illegal referendum turned violent. Nonetheless, CaixaBank still retains significant influence in the Catalonia region; this alone should make the new entity into a Spanish banking powerhouse, ready to “rub shoulders with the largest European financial institutions”.
Another hot topic of debate around this merger has been how the Spanish government itself stands to benefit from this deal. This is because in 2012 the Spanish government bailed out Bankia as part of a €40 billion rescue package for the Spanish financial industry. This left them with a 60% stake in Bankia, (since then increased to 61.8%), a bank that had missed 3 straight deadlines (and by all means looking to miss a 4th one this January 2021) to take the company private and return the taxpayers’ money. Although in all likelihood this recouping of taxpayers’ funds still won’t take place after the merger, Luis de Guindos (ECB vice-president) has repeatedly defended bailing out Bankia, warning the “alternative would have been significantly more costly” and expressing hope that the merger might improve the situation. Moreover, after the merger, the State will see its stake diluted to a much more digestible 15% of a bank that looks to be more profitable than the weakened stand-alone Bankia. Consequently, the ECB and Banco de España have collectively voiced their approval of this deal, as the ECB actively encourages further consolidation of the European banking industry. This process is expected to take place “by stages”, with this merger seemingly being the first one.