BBVA's Turkey M&A logic beats currency chaos – Reuters

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LONDON, Nov 24 (Reuters Breakingviews) – In an ideal world, Banco Bilbao Vizcaya Argentaria (BBVA.MC) would have nothing to do with Turkey. But that’s not where Chairman Carlos Torres Vila finds himself. The Spanish group already owns just under half of local lender Garanti BBVA (GARAN.IS), and launched a bid last week to buy the rest. A currency crisis in the interim is a harsh reminder of the risks, but Garanti’s low valuation and the inefficiency of the status quo just about give him reason to push on.
Torres Vila last Monday offered 12.20 lira per share to Garanti’s minority investors, implying a 2.2 billion euro outlay. Since then, Turkey’s lira has lost a fifth of its value against the euro, prompted by a politically motivated read more interest-rate cut by the central bank.
The crisis could hurt Garanti in two ways. First, a weaker lira makes it harder for borrowers to service dollar-denominated debt, pushing up future loan defaults. Garanti has reduced its foreign-currency exposures much faster than others, but at $11.6 billion, they’re still almost one-third of total loans. Second, the unorthodox monetary easing raises the prospect of a massive rate hike at some point in the future. That would squeeze lending margins, as deposits instantly become more expensive while loans take longer to reprice.
But Garanti’s low valuation, less than 4 times expected 2022 earnings based on BBVA’s offer price, gives Torres Vila plenty of headroom. Next year’s earnings could fall 45% compared with the median of analyst forecasts compiled by Refinitiv and he’d still earn a 15% return on investment in lira terms, according to Breakingviews calculations. His euro return should stay the same throughout the currency swings, since the hard-currency value of BBVA’s offer and Garanti’s future earnings move in tandem.
Crucially, cancelling the deal would leave Torres Vila in the suboptimal situation of consolidating Garanti’s assets but not all of its equity. That regulatory quirk makes owning half of the lender an inefficient use of the balance sheet. It also means that BBVA’s takeover of the bank will cost it much less in terms of common equity Tier 1 capital than the headline offer value. Leaving those benefits on the table by pulling out would also have investors wondering whether BBVA wanted to exit Garanti entirely, sending its value down further. Torres Vila’s best option is to put his head down and hold the course.
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CONTEXT NEWS
– Spain’s Banco Bilbao Vizcaya Argentaria on Nov. 15 said it would offer 2.2 billion euros for the 50.15% it does not already own of Turkish lender Garanti BBVA.
– The offer price of 12.20 Turkish lira ($1.22) per share was 15% above Garanti’s Nov. 11 closing price.
– Since then, the lira has weakened by roughly one-fifth against the euro. As of 0945 GMT on Nov. 24, BBVA’s shares were 13.2% lower than their closing price prior to the announcement of the deal. Spanish rival Banco Santander is down 2.4% over the same period.
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