MADRID/NEW YORK (Reuters) - Banco Bilbao Vizcaya Argentaria SA (BBVA.MC), Spain's second-largest bank, agreed to buy Compass Bancshares Inc. CBSS.O for $9.6 billion, realizing a long-held goal of gaining a solid foothold in fast-growing southern U.S. states.
Shares of BBVA fell Friday amid concern that the bank is overpaying. Yet analysts have long considered Compass an attractive takeover target because of the rapid growth in areas where it operates, including Texas and other states with big Hispanic populations.
"BBVA is paying a lot," wrote CreditSights Inc. analyst John Raymond. "(Still), the deal makes strategic sense, given BBVA's well-flagged desire to continue adding to the franchise it has been expanding across neighboring territories."
Shareholders of Birmingham, Alabama-based Compass will receive $71.82 in cash or 2.8 BBVA American Depository Shares BBV.N for each share.
That represents a 16.3 percent premium over Compass' closing price on Wednesday, before takeover speculation caused a 7.4 percent surge on Thursday. BBVA will issue about 196 million shares, and pay $4.6 billion in cash.
"It was an absolutely unique franchise, a leader in high-growth markets in the United States," said Jose Ignacio Goirigolzarri, BBVA's No. 2 executive, on a Webcast.
BBVA has been making acquisitions in the southern United States to diversify its business and benefit from cross-border money flows with Mexico, where it owns top lender Bancomer.
Compass would become the bank's largest foreign purchase. It has $34.2 billion of assets and operates 415 branches, including 162 in Texas and 253 in Alabama, Arizona, Colorado, Florida and New Mexico. The purchase would triple BBVA's U.S. base to 622 branches, including 33 in California.
BBVA last year paid $2.64 billion for two Texas banks, McAllen's Texas Regional Bancshares Inc. and Fort Worth's State National Bancshares Inc. In 2005, it bought Laredo National Bancshares Inc. for $850 million.
The transaction is expected to close in the second half of 2007. BBVA will merge the other three banks with Compass, and expects U.S. banking to contribute 10 percent to total profit.
Other banks with major Texas branch presences include Bank of America Corp. (BAC.N) and JPMorgan Chase & Co. (JPM.N).
D. Paul Jones Jr. will continue to run Compass. On a conference call, he said Compass will keep its name and Birmingham headquarters, and said cost savings of about 7.1 percent will include some job cuts. "There's an awful lot of operating leverage to be gained, if you will," he said.
In November, two other Birmingham banks merged, when Regions Financial Corp. (RF.N) paid about $10 billion for AmSouth Bancorp Inc.
Analysts estimated that BBVA paid 3.3 to 3.4 times book value and 19 times expected 2007 profit for Compass. The latter compares with a 13.9 multiple for the S&P Regional Banks Index .GSPBNKS.
Moody's Investors Service, Standard & Poor's and Fitch Ratings affirmed BBVA's and may raise Compass' credit ratings.
Compass shares rose $4.04, or 6.1 percent, to $70.41 in afternoon trading on the Nasdaq. BBVA shares fell 48 cents to 19.49 euros in Madrid.
SURPRISING THE MARKET
The purchase will increase BBVA's capital level by 5.5 percent. Last year, the bank carried out a surprise 3 billion euro capital increase to strengthen its balance sheet following U.S. and Chinese acquisitions.
To help fund the Compass purchase, BBVA is selling its 5 percent stake in utility Iberdrola (IBE.MC), and expects to realize an 844 million euro capital gain.
Chairman Francisco Gonzalez wouldn't say whether BBVA might sell other holdings, which include 6 percent of Telefonica (TEF.MC).
"Iberdrola was our least strategic stake. Telefonica is the most strategic, although that does not mean 100 percent strategic," Gonzalez said at a news conference.
BBVA believes that high immigration levels and the prospect of U.S. cost cuts justified Compass' purchase price, a person familiar with the matter said. The bank plans no more U.S. acquisitions until it absorbs Compass, the person said.
One investor said BBVA had wrong-footed the market.
"Plenty of hedge funds (are) unwinding positions in BBVA because they saw the bank as a target," said Javier Galan, a fund manager at Renta 4 brokerage.
Sandler O'Neill & Partners LP and the law firms Balch & Bingham LLP and Wachtell, Lipton, Rosen & Katz advised Compass on the transaction. Morgan Stanley and the law firm Cleary Gottlieb Steen & Hamilton LLP advised BBVA.