The proposed deal aims to create a European banking powerhouse capable of competing with industry heavyweights such as Santander, BNP Paribas and HSBC.
BBVA, Spain's second-largest bank with a large footprint in Latin America and Turkey, announced its all-share bid in May 2024, valuing Sabadell at around €15 billion ($18 billion).
After gaining approval from the European Central Bank and Spain's competition and stock market regulators, BBVA must now win over Sabadell's shareholders during a 30-day period that started on Monday.
"The price of the offer does not adequately reflect the intrinsic value of Banco Sabadell's shares, underestimating the project very significantly," the bank's board said in a report released on Friday.
Believing the takeover "destroys value for Banco Sabadell shareholders", the board "unanimously rejects the offer and therefore considers that the best option for shareholders... is not to accept it".
Founded in 1881 near Barcelona, Sabadell has a dispersed ownership structure. No investor holds more than seven percent of the bank, making the outcome of the takeover bid uncertain.
Sabadell's bosses are determined to maintain the independence of Spain's fourth-biggest bank and had already expressed their opposition to the takeover.
It has sold its UK subsidiary TSB to BBVA's biggest rival Santander, in what was seen as an effort to weaken its appeal as a takeover target.
Analysts said selling TSB would also give Sabadell more cash for dividends, share buybacks or acquisitions that could reduce the appeal of BBVA's offer to shareholders.
Spain's left-wing government is concerned about reduced competition and imposed strict conditions on the operation in June, requiring a three-year freeze on any merger between the two lenders.
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