UniCredit’s Orcel could tighten its offer and launch a double M&A offensive

Divided between two takeover rounds, UniCredit’s Andrea Orcel still has room to strengthen his bid for Italy’s Banco BPM, analysts say, as political unrest holds up a deal with the German bank. Commerzbank.

Once a key architect in the controversial takeover and subsequent collapse of Dutch bank ABN Amro in 2007, Orcel revised its ambitions for cross-border consolidation with the announcement in September of a surprise build of a stake in Commerzbank. Until recently, the latter had been the subject of speculation as a potential merger partner for Germany’s largest lender, Deutsche Bank.

Amid resistance from the German government – ​​and turbulence in Chancellor Olaf Scholz’s ruling coalition – UniCredit also set its sights on Banco BPM last month, with a 10 billion euro ($10.5 billion) offer that its Italian counterpart said ‘unusual conditions’ was released. and does not reflect its profitability and growth potential.

Along the way, Orcel drew frowns from the Italian government, with Economy Minister Giancarlo Giorgetti warning that “the surest way to lose a war is a fight on two fronts.” according to Italian news channel Ansa.

Analysts say rejected UniCredit – whose CET1 ratio, which reflects the bank’s financial strength and resilience, rose above 16% in the first three quarters of this year – can still improve its domestic bid.

‘There is room to increase the supply [Banco BPM] offer,” Johann Scholtz, senior equity analyst and Morningstar, told CNBC.

However, he warned of “limited” space to do so. “Think of more than 10% [increase]you will likely dilute shareholder profits.”

UniCredit’s starting proposal was an all-share deal that would combine two of Italy’s largest lenders, but offered only 6,657 euros for each share.

Both Scholtz and Filippo Alloatti, senior credit analyst at Federated Hermes, said UniCredit could sweeten the proposal by applying a cash component.

“Remember, this is Orcel’s second attempt to bribe [Banco] BPM… I don’t think there will be a third attempt. I think they either close [the deal] now, or probably he’s walking. So I believe there could be a cash component on the table,” Alloatti told CNBC. Orcel last month labeled Banco BPM a “historic target” – fanning the flames of media reports that UniCredit had sought a domestic union earlier in 2022.

The Italian scene was set for M&A early last month, after Banco BPM acquired a 5% stake in Monte dei Paschi – the world’s oldest lender and another former UniCredit takeover target, until talks collapsed in 2021 – when Rome tried to reduce his stake in the rescued bank.

Crucially, Scholtz noted, UniCredit’s offer “moves [Banco] BPM finds itself in a difficult position’, triggering a passivity rule that prevents it from taking any action that could hinder the bid without shareholder approval – and which could undermine Banco BPM’s own ambitions in early November. acquire control over fund manager Anima Holding, which also owns a 4% stake in Monte dei Paschi.

A consolidation offensive could be UniCredit’s best defense in an interest rate easing environment.

“Multi-year restructuring, balance sheet risk reduction and significantly improved loss absorption capacity” brought UniCredit to a BBB+ long-term debt rating from Fitch Ratings in October, higher than that of Italy government bonds.

But the lender now faces an environment of monetary policy easing, where it is “more exposed to changes in interest rates due to its relatively limited presence in asset management and bancassurance,” said Alessandro Boratti, an analyst at Scope Ratings. wrote last month.

Both takeover prospects hedge some of that exposure. A Commerzbank union in Germany, where UniCredit operates through its HypoVereinsbank division, could create synergies in capital markets, advisors, payments and trade finance activities, JPMorgan analysts noted in a November note. They added that such a union would provide a “limited” benefit in terms of financing because the two banks’ spreads are already closely linked.

Closer to home, Scholtz notes, Banco BPM offers additional strength in the field of asset management. Alloatti said absorbing a domestic competitor is also one of the Italian lender’s only remaining options to take a leading role on the home stage.

“There really isn’t much they can buy in Italy to bridge the gap [Italy’s largest bank] Intesa. Probably Banco BPM… that’s why they looked at it in the past,” Alloatti said. “Banco BPM is the only bank they could potentially buy to get a little closer to Intesa.” Intesa Sanpaolo is currently the largest bank in Italy in terms of total assets.

Approaching Banco BPM, KBW analyst Hugo Cruz told CNBC in emailed comments, also has the “added value” of signaling to German shareholders that UniCredit has other M&A options at its disposal. Nevertheless, he stressed that the domestic takeover bid is likely “mainly a response to the acceleration of the consolidation process in the Italian banking system” caused by Banco BPM’s acquisition of its stake in Monte dei Paschi.

Orcel may have to choose between going big abroad or staying at home, with analysts pointing to high integration costs and a toll on management time as UniCredit tries to absorb both takeover targets.

Ultimately, KBW’s Cruz said, the Italian lender was 15^e consecutive quarter of growth this fall and has seen its share price rise about 61% so far this year – may choose to stand alone.

“I don’t think Mr Orcel needs to make a bank takeover. He has already indicated that any acquisition will have to add value compared to [UniCredit]”If there is no takeover, the bank will continue with the same strategy, which already included a high degree of capital distribution for shareholders and focused on the use of excess capital by the end of 2027,” he said, noting that the Italian lender previously abstained from bids “because it was still in restructuring and did not have the takeover currency.”

“We hope they have the discipline to walk away from both deals” if they don’t deliver returns to shareholders, Morningstar’s Scholtz added.