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Unicaja & Liberbank: A possible merger?

 

A merger under way?

Unicaja and Liberbank have both confirmed preliminary conversations on a theoretical consolidation process. According to the press, the potential cost savings from this deal could be as high as €200mn per year, figure that represents 50% of Liberbank’s cost base.

The investment rationale

On our view, a merger of Unicaja and Liberbank makes strategic and economic sense. First, the erosion on the business would be limited due to the minimal overlaps in their commercial networks. Recall that Liberbank’s regions of origin are Asturias, Cantabria, Castilla La Mancha and Extremadura while those of Unicaja are Andalucía and Castilla-León. Second, the cost synergies arising from a potential deal should be high (as much as 50% of the cost base of the smaller group is a sensible starting point on our opinion). Consequently, sub–par ROTE of both entities (c. 4%/5% in 2018e) may jump some 2pp leading the way to meet the cost of capital (10% on our assumptions) earlier. Third, the investment needs for the digitalisation process and the regulatory requirements would be easily absorbed in a larger entity.

A very preliminary calculation of the impacts

Assuming: (a) annual cost synergies of €200mn that imply a net present value of €1,4bn after taxes, (b) a restructuring charge between €325mn and €400mn (some €150,000 per employee), (c) the share exchange ratio is calculated with Dec., 11th prices and no premium and (d) the cost savings are split depending on the market cap weight of the combined entity, the impact over the last price would be c. +35% both entities. We maintain our Buy recommendation on both entities.