Spain's BBVA has confirmed it will proceed with its hostile takeover bid for smaller rival Banco Sabadell, despite the Spanish government imposing conditions that would prevent the banks from fully merging for at least three years.

The country's second-largest bank announced on Monday that it would not withdraw its offer worth more than €14 billion ($16 billion), even though Madrid's restrictions will delay some of the expected cost savings from the deal.

"After reviewing the resolution, BBVA has decided not to withdraw the offer," the bank said in a regulatory filing. The lender had previously estimated it could achieve €850 million in annual cost savings from the acquisition, primarily through administrative and IT efficiencies.

The Spanish government authorised the economic concentration on 24 June but imposed strict conditions requiring both banks to maintain separate legal entities and management autonomy for at least three years. The cabinet could extend this restriction for another two years.

BBVA chairman Carlos Torres Vila defended the decision to proceed, stating: "The project creates significant value for the shareholders of both entities and represents a unique opportunity to build one the most competitive and innovative banks in Europe."

He added that the combined entity would be "a stronger institution, with greater scale and the capacity to increase lending to households and business by €5 billion annually, thereby supporting the economic growth of our country".

The takeover battle has intensified with the emergence of potential bidders for Sabadell's British subsidiary TSB. Sources told Reuters that rival Spanish bank Santander has submitted a binding offer for the UK unit, whilst reports suggest Barclays has also tabled a bid. Both banks declined to comment on the reports.

Analysts view the potential TSB sale as a defensive move by Sabadell to complicate BBVA's takeover attempt. If BBVA succeeds in acquiring Sabadell, the latter would need shareholder approval before selling TSB.

The government's conditions also stipulate that neither bank can reduce staff or close branches in the event of a merger, reflecting broader European political concerns about preserving jobs despite calls from eurozone banking supervisors for sector consolidation.

Under Spanish law, whilst the government cannot prevent BBVA from purchasing Sabadell shares, it retains final authority over whether a full merger can proceed. This creates the possibility that BBVA could acquire a majority stake without achieving the operational integration needed to realise expected synergies.

The Spanish securities market regulator must now approve BBVA's formal takeover prospectus, which could happen within three weeks. Following approval, Sabadell shareholders would have 30 to 70 days to decide whether to accept the offer.

BBVA first launched its unsolicited bid in May 2024, which was promptly rejected by Sabadell's board. A successful combination would create a banking giant with more than 140,000 employees worldwide, joining Spain's second and fourth-largest banks by market capitalisation.

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