Quindell (LSE: QPP) rose more than 20% on Monday in the wake of takeover talk, while TSB Banking Group (LSE: TSB) has gained 24% of value since Spain’s Banco Sabadell proposed to acquire the British bank last week. You may well wonder whether it would be a great time to take profit on both. Well, read on…
A Win-Win?
All sort of bad news has swirled around Quindell in recent months, but it looks a lot like those who invested at the bottom of its valuation range in December may have the last laugh. Apparently, the same applies to TSB shareholders. Or does it?
Enter Banco Sabadell, a Catalonia-based bank with a strong regional focus. It has bought lots of distressed assets since the onset of the credit crisis, and has become a stronger financial institution, but it still has one big problem: its assets base is not properly diversified. So, TSB has become Sabadell’s preferred investment to chase non-organic growth abroad. The Spanish bank will likely have to issue expensive equity capital to acquire TSB for £1.7bn, which is the reason why its shares have plunged more than 10% since the proposal was announced.
While you may argue that TSB shareholders would be better off if the bank was bought by its Spanish suitor, it remains unclear why the UK government would want Sabadell to lead the show domestically and start competing with other retail banks. Analysts have also argued that political risk could prevent a deal from happening, adding that Sabadell may be asked to ring-fence part of the capital and the assets of the combined entity, while targeting low cost savings, among other things.
Will Tesco Bank Bid Up For TSB?
What I know is that if TSB became part of Sabadell, it would give up paying taxes to the UK government, and that’s a good enough reason to doubt that the deal would go through. Business Secretary Vince Cable pointed out that Banco Sabadell could boost small business lending, but I don’t buy into that argument.
Surely, it would be a great opportunity for Lloyds to cash in on its residual stake in TSB at a high price.
What are the alternatives, though?
Sabadell is a chronic underperformer, with its stock down 36% in the last five years. If I were a TSB shareholder, I would have certainly preferred to become part of the Tesco family — a tie-up with Tesco Bank would make a lot of sense strategically and economically — by receiving a cash-and-stock offer. After all, TSB could be an attractive long-term play on retail banking in the UK.
The issue here is that Tesco must be careful in managing its finances, and needs divestment more than acquisitions. Well, Tesco Bank doesn’t seem to be very serious about growing its business, anyway, as its track record in the last decade shows.
Quindell’s Risk Profile Heightens
Talking about companies that may disappoint investors, let’s move on to Quindell, which has come under the M&A spotlight once again this week.
Quindell shares rose above 120p on Monday following takeover chatter, according to which Australia’s law firm Slater & Gordon would buy Quindell’s legal services division for more than £600m, valuing the stock above 140p a share. I reiterate the view that Quindell remains a very speculative bet and, at its current valuation, for me it’s not a risk worth taking. Forget about trading multiples, which might point to value: they mean very little right now.
It’s hard to draw parallels with TSB, of course, but if things do not work according to plan, both Quindell and TSB shareholders may have to nurse big losses. The big difference is that TSB may be a risk worth taking, while in my opinion Quindell is not.
