Spain's government has imposed conditions on BBVA's €14 billion takeover bid for Banco de Sabadell, requiring the two banks to operate separately for at least three years if the deal proceeds.

The decision represents a significant hurdle for BBVA's hostile takeover attempt, which has already been delayed for nearly 16 months. Economy minister Carlos Cuerpo announced that the banks must "maintain separate legal identities and assets, as well as autonomy in the management of their activities" for three years, with the possibility of extending this period for another two years.

"What we are doing is protecting workers, protecting companies and protecting financial customers," Cuerpo said at a news conference.

The government's conditions would prevent BBVA from achieving the full integration it seeks, potentially limiting the €850 million in cost savings the bank has promised investors. Under the restrictions, Sabadell management would retain control over lending decisions, particularly to smaller businesses, staffing levels and branch numbers.

BBVA chairman Carlos Torres had previously stated that the bank could achieve most of its targeted savings even without a full legal merger. However, some analysts remain sceptical about the returns without complete integration.

"We find it hard to believe that BBVA will be able to generate sufficient synergies to make this deal work on paper," said analysts at RBC Capital Markets. "We believe that BBVA should walk away and compensate shareholders for a messy year with a large buyback."

The Spanish government cannot prevent BBVA from purchasing Sabadell shares but retains the authority to block any subsequent merger. The takeover has already received approval from Spain's competition watchdog and the European Central Bank.

The decision reflects broader political tensions, with the government's coalition relying on support from Catalan politicians who oppose the deal. Sabadell has significant operations in Catalonia, and regional leaders fear the loss of financial jobs and influence to Madrid.

European Union officials have expressed frustration with Spain's intervention, having warned against interference last month. The EU has been advocating for greater banking consolidation across the bloc to improve profitability and international competitiveness.

BBVA shares rose 2.45 per cent following the announcement, while Sabadell gained 0.45 per cent. The bank said it would "evaluate the conditions" imposed by the government.

A Sabadell spokesperson said BBVA must analyse the impact of the conditions on expected synergies and reiterated the bank's intention to remain independent.

The deal now faces an uncertain future, with BBVA weighing whether to proceed with the tender offer, challenge the government's decision in court, or abandon the takeover entirely.

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