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Spanish bank BBVA has launched a hostile offer for Banco Sabadell after the board of its domestic rival rejected an approach.

BBVA took its all-share offer directly to Sabadell’s shareholders on Thursday, less than a week after the target’s board said the bid had “significantly undervalued” the bank and its prospects.

The initial takeover offer, made last week, valued Sabadell at €12bn, but that price has since fallen as BBVA shares have declined.

The increasingly fractious spat between the banks is rare in Spain, a country unaccustomed to hostile bids. The country has seen more than 20 in the past three decades but most have failed.

BBVA’s decision to go hostile triggered a sharp rebuke from the Spanish government.

“The government rejects BBVA’s decision to launch a hostile takeover bid for Sabadell, both in form and in substance,” said a government official, warning of “potentially damaging effects on the Spanish financial system”.

Shares in BBVA fell a further 5 per cent in early trading on Thursday, a drop that left the offer valuing each Sabadell share at €2.02 and the bank at €10.94bn. Shares in Sabadell climbed 4.5 per cent.

Under the terms of the bid, BBVA is offering one newly issued share for every 4.83 Sabadell shares.

“We are presenting to Banco Sabadell’s shareholders an extraordinarily attractive offer to create a bank with greater scale in one of our most important markets,” BBVA chair Carlos Torres said, as the lender launched its tender offer for Sabadell shares.

Sabadell board’s rejected the bid on Monday, saying it “significantly undervalued” its growth prospects.

Sabadell on Wednesday took the unusual step of publishing a private email sent on Sunday by Torres to its chair Josep Oliu in which BBVA indicated it would not increase its bid. “I consider that it is very important that your board of directors knows that BBVA has no room to improve its economic terms,” Torres wrote.

The deal would bring together the third- and fourth-largest banks in the Spanish market, creating a lender with the biggest domestic balance sheet. Sabadell also owns UK lender TSB.

The two banks attempted to strike a deal four years ago at the height of the pandemic, but merger talks broke down after two weeks following disagreements over pricing.

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Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

President Joe Biden has told Israel that the US would withhold the supply of offensive weapons if it moved ahead with a full invasion of Rafah in southern Gaza, in his starkest warning yet over its conduct of the war against Hamas.

Biden’s comments, in an interview with CNN during a trip to Wisconsin, came after Washington had already paused a shipment of munitions heading to Israel, amid concern over its operations in Rafah, where more than 1mn Palestinian civilians have been sheltering.

The US has opposed Israel’s plans for an assault on Rafah, hoping instead to help broker a deal between Israel and Hamas to free hostages held in Gaza and reach a ceasefire lasting at least six weeks.

But with the fate of those talks still uncertain, Biden publicly warned Israel that Washington would curtail its supply of weapons depending on its conduct in Rafah — a step that his administration had been unwilling to take until now.

“Civilians have been killed in Gaza as a consequence of those bombs and other ways in which they go after population centres,” Biden told CNN.

“I made it clear that if they go into Rafah — they haven’t gone in Rafah yet — if they go into Rafah, I’m not supplying the weapons that have been used historically to deal with Rafah, to deal with the cities, that deal with that problem.”

Lloyd Austin, the US defence secretary, told a congressional hearing earlier on Wednesday that Washington had “paused one shipment of high payload munitions” to Israel over concerns about its looming ground operation in Rafah.

“We’re going to continue to do what’s necessary to ensure that Israel has the means to defend itself,” he said. “But that said we are currently reviewing some near-term security assistance shipments in the context of unfolding events in Rafah.” 

Israel sent ground troops into Rafah on Monday night, seizing the main border crossing between Gaza and Egypt. It has threatened to expand the operation in a city it calls Hamas’s last stronghold.

The pause in arms supplies marks the first known time that the US has held up a potential weapons delivery since Hamas attacked Israel on October 7 and the Jewish state launched its retaliatory offensive against the militant group in Gaza.

The US decided to withhold the shipment last week after discussions over how Israel would meet the humanitarian needs of civilians in Rafah did not fully satisfy Washington’s concerns.

Israel’s military tried to play down any rift, with Israel Defense Forces spokesman Daniel Hagari saying the allies would resolve any disagreements “behind closed doors”.

In addition to the shipment paused last week, Washington was “reviewing others,” said Matthew Miller, the state department spokesperson. “We remain committed to Israel’s defence, but in the context of the unfolding situation in Rafah, it is a place where we have very serious concerns, and that’s why we take the actions we take.”

A senior US official said the process that led to the shipment pause began in April, with the Pentagon ultimately withholding 1,800 2,000-pound bombs and 1,700 500-pound bombs.

The use of some of the most destructive US-supplied bombs in Israel’s arsenal has come under intense international scrutiny since their use in heavily populated areas can lead to unforeseen civilian casualties. The US military has used 2,000-pound bombs only sparingly in its recent military campaigns in the region.

“We are especially focused on the end-use of the 2,000-pound bombs and the impact they could have in dense urban settings, as we have seen in other parts of Gaza,” the senior US official said. “We have not made a final determination on how to proceed with this shipment.”

The Biden administration had also informally delayed shipments of Joint Direct Attack Munition kits and small-diameter bombs, according to people familiar with the matter. The official said these cases remained under review.

“For certain other cases at the state department, including JDAM kits, we are continuing the review,” the official said. “None of these cases involve imminent transfers — they are about future transfers.”