Full scale UK entry for Sabadell (whose mainly active in Spain and in the US and no existing exposure to UK) targeting TSB’s 100% focus on UK: acquisition of TSB (which is 12th largest retail lender in the UK with 631 branches) would gain a foothold in UK, and could potentially act as a platform for further acquisitions for Sabadell.

Proposal from Spanish banking giant Sabadell comes less than 12 months after Lloyds IPOd/carved out a 50% stak e in TSB in Jun-14 at GBp 260 a share. However deal alsocomes before December 2016 at the latest where Lloyds is due to divest the remainder of its current 50% TSB stake (as per EU state aid rules).

Given a) attractive take out premium offered, b) fact that Lloyds will be a forced seller in the medium-term; and c) BBC reporting that Llloyds is said to be backing this offer from Sabadell, it looks like main pre-deal condition (of required Lloyds shareholder backing) should be satisfied.

Given a) willing Board recommendation at proposed offer price and b) very good probability that Lloyds will be backing this deal,very high likelihood that this deal will be firmed with 2.7 announcement in the next couple of weeks ahead of the 09-Apr-15 PUSU deadline date.

Main and only outside risk is related to potential Sabadell shareholder side: although deal doesn’t look to require any Sabadell shareholder approval, it might require Sabadell shareholder approval for financing through rights issue or ABB (accelerated book build) as most likely Sabadell will need to issue about 12-18% of new equity should it want to keep its CET1 ratio at 11.5%. Some shareholders might question this deal and might oppose what could be questionable strategy of acquiring this UK lender (no real overlap/synergies potential)) at a time Sabadell hasn’t fully sorted out its domestic Spanish market while also in process of trying to expand in Latin-America(eg Sabadell stock was down more than 8% on TSB offer announcement prior to stock being suspended). 

Once this deal will be firmed up, deal spread should trade very tight to GBp 340 cash offer terms as a) deal will have already received backing from its largest (Lloyds) 50% shareholder, and b) regulatory approvals should just be formality from number of UK financial regulators (as TSB being a smallish player and  100% focused on UK mortgage lending vs Sabadell focused on Spain and US).Once deal would be firmed up expect to trade in GBp 332-336 range, trading in 3-5% pa spread on Jul-Aug-15 closing:

Extremely hard to rule out any further competitive interest as a) once Lloyds agree to be backing Sabadell’s offer, then its stake and whole of TSB is officially being put in play; b) TSB represents only smallish asset being subscale 12th largest mortgage lender in UK; and c) at 1x book, exit multiple is highly conservative.

Strategic Spanish buyer putting its foot in the UK mortgage lending door. Pre-deal status with very good chance of getting firmed up before 09-Apr-15 PUSU deadline (unless of course some significant skeletons in the closet are found in the completion of  Sabadell’s due diligence). Low conditionality should deal be firmed up. Still some chance for further 3rd party interest. 23-25% downside.