(Bloomberg) -- Banco Bilbao Vizcaya Argentaria SA’s second attempt to buy Banco de Sabadell SA isn’t proving popular. 

News of the bid has sent BBVA’s shares tumbling. At Sabadell, the manner of BBVA’s approach irritated executives even before Thursday’s shift to a hostile offer that they say broke the law. The Spanish government is opposed to the deal, too.

That hasn’t deterred BBVA’s Chair Carlos Torres. He doubled down on Thursday, arguing that a takeover was in the interests of all shareholders and saying the government would ultimately come around.

“The easiest decision would have been to abandon the project, but that’s not what we are paid for,” Torres said in a press conference Thursday after BBVA took its offer directly to Sabadell shareholders after being rebuffed by the board.

Whether it proves successful or not, his approach is rippling through Spanish banking. It has raised questions about where it leaves the country’s finance industry, if hostile takeovers could become less of a rarity, and what role the government plays. It’s also driven a rift between two lenders that together employ about 40,000 people in Spain, and their two chairmen.

Torres and his Sabadell counterpart Josep Oliu explored a similar deal already in 2020, though negotiations at the time quickly collapsed over price. Sabadell’s valuation subsequently soared as it resolved a pile of problems, including provisions linked to its small- and medium-sized enterprise business, and a troublesome UK unit TSB. The bank also sold off some businesses.

That cleanup, the strength of Spain’s economy and the wider interest rate environment have strengthened the rationale for a tie-up. A merger would create a new banking giant with a joint balance sheet of more than €1 trillion ($1.1 trillion) in assets and a combined market capitalization of close to €70 billion, not far from that of Spain’s largest lender, Banco Santander SA.  

The appeal to BBVA is clear. Its most profitable region currently is Mexico, which produced twice as much profit in the first quarter than its domestic operations. Adding Sabadell would boost BBVA’s presence in its home market while the smaller lender would diversify its income streams. 

The resulting entity — possessing the scale so urgently needed in European banking — would be ready for “the challenges of the future,” Torres said in a press conference held on Thursday.

That rationale drew Torres back into talks with Oliu. The pair had kept in contact after the first talks collapsed. They would meet two or three times a year, and both vacationed in the same small town in the north of Catalonia, according to people familiar with the matter. 

Both went to university in the US. Oliu, 75, was headed for a career in academics. He took over the bank in the 1980s after the death of his father, who had built it from a small town bank to a leading lender in Catalonia, for decades the industrial heart of Spain.

Torres, 58, graduated from MIT and started his professional career at McKinsey. He joined BBVA in 2008, becoming chair a decade later. He surprised many by naming Onur Genc, a Turkish citizen who spoke little Spanish, as chief executive officer as the bank looked to address its troubled investment in his native Turkey, another key market for the bank.

By mid-April of this year, the two chairmen were back discussing a possible tie-up in person. They set April 30 as the date for BBVA to send a formal offer, according to Torres. 

Despite the duo’s familiarity, relations quickly soured. Sabadell reported first-quarter results on April 25 and upgraded its guidance, sending its shares as much as 15% higher during the day. The market reaction effectively cut into the premium that BBVA hoped its all-share offer would provide. 

Then details of the talks leaked on April 30, and BBVA quickly released a regulatory filing announcing its interest in Sabadell. A day later, it sent a letter to Sabadell’s board detailing an exchange ratio of one newly issued BBVA share for every 4.83 Sabadell shares.

“The offer was still very incipient and when it was leaked the whole process has been rushed,” said Gonzalo Lardies, a fund manager at Andbank.

Spokespeople for the two banks declined to comment.

Still, some at Sabadell reportedly remained open to talks as recently as Friday, May 3. Then Torres sent a Sunday missive to Oliu saying the offer was final and wouldn’t be revised, citing the existing premium and fall in BBVA’s share price. 

A frantic week followed. On Monday, Josep Oliu ’s board rejected the proposal and on Wednesday published the letter in which Torres said the offer couldn’t be improved. The next day, BBVA went hostile.

Hostile takeovers are rare in European banking and generally not favored by regulators. Torres’s mission is further complicated because retail shareholders own about half the lender, and many have ties to Catalonia and may prefer to keep the bank rooted in the region, which prides itself on its autonomy, according to people familiar with the matter.

To succeed, BBVA needs more than half of Sabadell shareholders to accept its offer. It has already contacted some institutional investors and is optimistic about their “favorable views” of the deal, Torres said, comments that Sabadell later said violates takeover rules.

RBC analysts led by Benjamin Toms said in a note that BBVA’s share price would need to rise 13.5% from Thursday’s close for Sabadell shareholders to feel compelled to accept the tender offer.

BBVA also needs to secure approval from its own shareholders, and it needs Spanish regulators and the ECB to sign off. If the regulators approve, Spain has the final say on the deal. Economy Minister Carlos Cuerpo has said the government is against the “form and substance” of the deal.

Despite the challenges, Torres said he expects the government to eventually support the transaction once it is clear of this weekend’s regional Catalan elections, a view echoed by some analysts. The deal is likely to define his tenure, even as he seeks to brush off speculation that failure might cost him his job. 

“My future as chairman shouldn’t depend on this deal,” he said on Thursday. “I’m not worried about this.”

--With assistance from Jan-Henrik Förster.

©2024 Bloomberg L.P.