The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Liam Proud

LONDON, July 2 (Reuters Breakingviews) - Banco de Sabadell’s SABE.MC decade-long ownership of Britain’s TSB has seemed tortuous at times. The Spanish lender initially paid 1.7 billion pounds in 2015 and subsequently endured low returns and a now-infamous 2018 IT failure. Yet at the end of it all, Sabadell CEO César González-Bueno has managed to extract a double payoff. He’s got a nice price from compatriot Banco Santander SAN.MC, while also strengthening his defence against hostile suitor BBVA BBVA.MC.

The deal came together at a thunderous pace in recent weeks after rivals expressed interest in the British mortgage lender, according to people familiar with the matter. The cash price of 2.65 billion pounds, announced late on Tuesday, pleased both sets of investors: Santander’s shares rose about 3% on Wednesday morning while Sabadell’s jumped 5%.

It’s easy to see why. From the perspective of Ana Botín, who runs 108-billion-euro Santander, the key appeal is 400 million pounds of cost cuts. That’s equivalent to about half of TSB’s total expenses and 13% of the combined costs across the target and Santander’s local unit. The return on invested capital, the buyer reckons, exceeds 20%. That's well above the roughly 16% return on tangible equity that analysts are pencilling in for Santander as a group next year, using estimates gathered by Visible Alpha. The deal also allows Botín to grow her UK business without having to attract flighty yield-seeking deposits, and silences questions about whether Santander is committed to Britain.

Sabadell, meanwhile, can point to the handy valuation multiple it has managed to secure – 1.5 times tangible book, compared with a multiple of 1.2 on average for UK peers, using numbers from the company’s presentation.

It’s still been a rough ride overall. Including just the 2015 investment and the agreed exit price, the internal rate of return over the decade is a measly 5%, according to Breakingviews calculations. Lobbing in dividends of some 500 million euros pushes that number up by a few percentage points. But there's also an argument for factoring in the costs of a 2018 botched IT-system changeover, which disrupted customers’ banking access. Overall, it seems doubtful that Sabadell’s ownership has delivered anything like the double-digit returns bank CEOs typically target.

Yet relative to 2020, when TSB was lossmaking and seemingly of negligible value, González-Bueno’s exit still looks like a win. The price he’s secured also beats analysts’ most recent valuations for TSB by about a quarter, based on data gathered by Sabadell. Investors clearly like the bank’s commitment to send the proceeds straight out of the door through a special dividend.

Lastly, there’s a hidden perk for Sabadell. Wednesday’s price jump creates a headache for BBVA Chair Carlos Torres Vila, who wants to buy the smaller Spanish lender for about 14 billion euros. After selling TSB, the target bank’s stock is now 10% above the mostly share-based bid currently on the table. It has long seemed clear that Torres would have to dig deeper to have a chance of succeeding with his offer. This deal has only reinforced that reality.

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CONTEXT NEWS

Banco Santander on July 1 said it had agreed to buy TSB, the UK arm of Banco de Sabadell, for 2.65 billion pounds in cash.

The larger Spanish acquirer beat out rival bidder Barclays.

Santander expects to generate at least 400 million pounds of cost cuts by combining TSB with its own UK business, contributing to an anticipated 20% return on invested capital.

Shares in Santander rose almost 3% as of 0820 GMT on July 2, while Sabadell’s stock was up more than 5%.

(Editing by Aimee Donnellan; Production by Streisand Neto)

((For previous columns by the author, Reuters customers can click on PROUD/liam.proud@thomsonreuters.com))