(Bloomberg) -- Banco Bilbao Vizcaya Argentaria SA’s chair told his counterpart at Banco Sabadell SA that it has “no room” to improve its proposed takeover offer, citing in part the fall in its share price after news of its approach broke.

The rise in Sabadell shares since BBVA first assessed a bid in mid-April along with a €6 billion fall in BBVA’s market value when the deal became public “absolutely prevents us from being able to pay more,” BBVA’s Carlos Torres said in a message to Sabadell’s Josep Oliu on Sunday. The message was published in full by Sabadell on Wednesday.

The stance may help explain why Sabadell abruptly rejected the BBVA proposal on Monday saying that it “significantly undervalues the potential of Banco Sabadell and its standalone growth prospects.” That decision came even though some at Sabadell were said to be initially open to starting talks. 

The decision by Sabadell to publish the letter “could signal a deterioration of the communication between the two banks,” Mediobanca analyst Andrea Filtri said. That increases the likeliness that BBVA will bypass Sabadell’s management and make a direct offer to the lender’s investors, or end the takeover considerations entirely, Filtri said.

BBVA proposed all-stock deal would have valued the smaller bank at a 30% premium to its closing price on April 29 — or about €12 billion ($13 billion) — and a 48% uplift to its market value in mid-April. The deal would have given Sabadell shareholders a 16% stake in the combined company. 

Sabadell shares declined 4.8% in Madrid trading, the worst performing European bank Wednesday. BBVA advanced 0.8%.

Read the full message from Torres below:

Communication from BBVA’s chair to Sabadell on May 5

“I am writing to you as a follow-up to the e-mail I sent you last Tuesday in which I attached our proposal with the terms for a merger. I understand that you are evaluating it thoroughly to give us an answer, and in this respect I consider that it is very important that your Board of Directors knows that BBVA has no room to improve its economic terms.

As you know, the proposed exchange ratio (4.83x, equivalent to €2.26 per share at the time of the offer) represents a significant premium of 30% over the prices of April 29. However the premium is 48% compared to the prices prevailing when it was considered by our Board in mid-April, a figure that far exceeds the premium we were considering to offer at that time in order to start negotiations. In other words, in our proposal we have already used up all the room we had, after having maintained a premium of 30% despite the large relative increase of your shares from mid-April to 29 April.

In addition, since last Tuesday the market has also made it clear that there is no further upside, as BBVA’s market capitalization has fallen in the period by more than €6bn. This situation absolutely prevents us from being able to pay more premium than we are already offering, because if we were to do so it is foreseeable that our value would fall again (even by an amount higher than the premium increase we would make). The messages received from investors and analysts over the last five days are equally clear in this regard, and therefore agree with our analysis regarding the economic impact of the transaction for BBVA.

I am at your disposal for any clarification you may need regarding our proposal.”

 

(Updates with analyst comment in fourth paragraph.)

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