Photographer: Angel Garcia/Bloomberg

Catalan Uncertainty Is Putting Deals In Doubt

Updated on
  • Push for independence set to dent Spain’s economic growth
  • Premier threatening to take direct control of rebel region

Spanish dealmakers enjoying a boom in mergers and acquisitions this year have encountered an unexpected problem: Catalonia’s bid for independence.

The volume of transactions involving Spanish targets surged 83 percent to $62 billion this year, according to data compiled by Bloomberg, with the economy set to expand by at least 3 percent for the third straight year. Since shaking off the worst recession in its recent history, Spain has weathered terrorist attacks, the failure of a major lender and a 10-month impasse with no government last year without breaking stride.

But the Catalan government’s battle to break free of control from Madrid could prove a much more serious obstacle.

“Catalonia is now a storm that may turn into a typhoon unless tackled in time,” said Jose Maria Balaña, a corporate partner at law firm Hogan Lovells in Madrid. “The uncertainty around it is already having a negative impact on deals, in particular involving international investors, with some of them being put on hold or simply abandoned.”

Seventeen days after the rebel administration managed to pull off a makeshift referendum in defiance of the Spanish courts and police, Prime Minister Mariano Rajoy is still battling to reassert his authority. He’s given Catalan President Carles Puigdemont until Thursday to withdraw his claim of a mandate for independence or see the central government take direct control of the region.

“The only thing I ask of Mr Puigdemont is to act with judgement, balance, to put the common interests of both Spaniards and Catalans first, and to answer whether he has declared independence for Catalonia,” Rajoy said in parliament in Madrid on Wednesday.

Even with thousands of Spanish police stationed on cruise ships moored in the regional capital, the Catalans are still to blink.

“We’re not going to budge,” Catalan Government Spokesman Jordi Turull said at news conference in Barcelona on Tuesday. “From Thursday we’ll see which scenario the Spanish government is opting for, whether it’ll continue with repression or sit down to talk.”

Confidence Dented

The uncertainty in the northeastern region, which accounts for a fifth of Spain’s economy, is starting to hurt.

Spanish business confidence dropped for the first quarter in seven, the National Statistics Institute said last week, while the European Commission’s gauge of consumer confidence has slipped for the past two months. 

Some 700 companies have transferred their legal bases out of Catalonia to other parts of Spain since the Oct. 1 ballot, El Pais reported, citing data from Spain’s College of Registrars. On Monday, the government cut its economic forecast for 2018, projecting growth of 2.3 percent next year instead of the 2.6 percent.

Despite the threat of the conflict escalating further, builder ACS led offered 18.6 billion euros for toll-road operator Abertis Infraestructuras SA via its German unit Hochtief AG, topping an offer of 16.3 billion euros from Italy’s Atlantia SpA. In a separate transaction, OHL, the embattled Spanish company, on Monday agreed to sell its concessions unit to Australia’s IFM Investors for 2.24 billion euros ($2.64 billion) to reduce debt.

Deutsche Bank AG on Monday dropped plans to sell its Spanish retail operation after failing to achieve a satisfactory price, according to a person briefed on the matter. Meanwhile, Liberbank SA, a lender, is preparing a 500 million-euro rights offering to raise funds to clean up its balance sheet.

The benchmark IBEX 35 index rose 0.5 percent at 16:50 p.m. in Madrid. The spread that investors demand to hold Spanish 10-year debt compared with similar German bonds, widened to 121 basis points from 118 basis points yesterday.

‘Spain Is Stable’

Even after the violence and the brinkmanship of the past month, few outsiders are factoring in much chance that the Catalan separatists achieve their objectives. The European Union is lining up behind Rajoy to insist Catalonia risks being shut out of EU markets and cut off from funding by the European Central Bank.

“Despite the current turmoil we don’t expect this to happen in the end because Spain is a modern, solid and stable democracy,” said Jorge Vasallo, managing partner of investment banking at Arcano Partners in Madrid. “It has all the necessary tools to avoid breaking with the current rule of law.”

British Prime Minister Theresa May was the latest to offer her support, telling Rajoy in a phone call Tuesday that the U.K. would not recognize a unilateral declaration of independence, according to a statement from her office. Earlier this year, May rejected Scottish calls for another vote on breaking away from the U.K. following the decision to leave the EU. Scots voted to remain in the bloc.

Yet the costs of the struggle with Catalonia are sapping the political energy from Rajoy’s minority government all the same. 

Rajoy pulled a draft budget bill from parliament last month because he didn’t have the votes to pass it. His Basque allies, who also have to contend with a separatist movement, are balking at supporting Rajoy while he’s cracking down on the Catalans. The lack of a budget was another factor the government cited as it lowered its growth forecast.

“Spain had until last month been a darling market for M&A this year,” said Enrique Quemada, chairman of investment bank ONEtoONE Corporate Finance in New York. “However, the Catalonian conflict poses some serious risks going forward unless it gets resolved soon, as international investors will be more reluctant to buy assets there.”

— With assistance by Eddie Buckle, and Charles Penty

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