Best of Lex: deals out the door

PNC/US bank M&A, BBVA/Sabadell, EU banks, Thyssenkrupp, easyJet/European airlines, Airbnb, DoorDash

A deal with Sabadell would bolster BBVA’s exposure to domestic lending business but would also mean taking on the struggling division TSB © REUTERS

Dear readers,

BBVA’s decision to sell its US regional banking arm at the start of the week may have coincided with fears of a constitutional crisis but the timing appears to be accidental. After all, the Spanish bank is underweight in the US sunbelt, which is following the rest of banking into cost-driven consolidation.

There is also the high price that buyer PNC is willing to stump up: $11.6bn in cash — twice what analysts had expected. The sale of a stake in asset manager BlackRock means PNC can afford to pay a hefty 1.3 times book value.

A valuation that left European bank investors gawking sent shares in BBVA soaring on the day. Jubilation did not last as news broke that BBVA might buy smaller rival Sabadell. The local Spanish laggard trades at a paltry 0.2 times book value. Even a nil-premium all-share deal would consume capital freed up by BBVA’s US sale. Lex thought such a deal might be fair, bolstering BBVA’s exposure to domestic business lending. But it would also mean taking on Sabadell’s struggling UK division TSB.

Still, BBVA may have little choice. Regulators in Spain are keen to complete the job of tidying up the mess left over from the financial crisis. A number of mergers are already under way. Getting that job done is also front of mind for pan-European regulators at the European Central Bank. National deals provide security but cross-border deals are viewed as the route to building a globally competitive sector in the continent.

Lex thought Franco-Italian tie-ups were most likely. A deal between UniCredit and Société Générale, or perhaps BNP Paribas, could create a European champion. But without higher rates to drive profitability, cross-border banking mergers seem likely to remain in the realm of fantasy dealmaking.

Thyssenkrupp is another European business stuck in struggling legacy sectors. The German industrial conglomerate announced that it expected a €1bn loss this year and further job cuts. Having already sold off its profitable elevator division, a further break-up looks inevitable. After a failed merger of its steel business, chief executive Martina Merz will try to improve the unit’s fortunes and seek a sale. Expect state aid to be made available while that process drags on.

Airlines have been some of the biggest recipients of government money since the taps opened at the start of the pandemic. The sector has so far received about $140bn of state support — with another $27bn in the works, thinks data group Ishka Global. The UK’s easyJet showed why this week, reporting a £1.3bn loss for the year. The group has raised £3.1bn in 2020, including central bank credit lines. But it will need its £2.3bn liquidity buffer, having burnt through £651m in its fourth quarter.

In the US tourism industry, rental accommodation group Airbnb has also suffered. It relied on a $2bn injection from private equity investors to weather the storm. Now, however, enthusiasm over vaccines and a faster recovery coincide with plans for an initial public offering at an optimistic $30bn valuation. Investors need to ask themselves whether the group’s revenue growth of almost 40 per cent between 2017 and 2019 can continue post-pandemic.

The US’s largest food delivery group DoorDash has also filed to go public this week. The pandemic has boosted demand for home delivery but profits remain scant due to tough competition. A $20bn valuation for the lossmaking company would be 23 times its trailing sales. Limited take-up of DoorDash’s membership programme highlights the sector’s biggest problem: little customer loyalty outside of price. Expect cash raised from a public sale to continue to feed losses for some time in the future.

Enjoy the weekend,

Andrew Whiffin
Lex writer