Italian Banker Has a Strange Understanding of 'Zero Chance'

(Bloomberg Opinion) -- “Zero chance.” That’s how Intesa Sanpaolo SpA’s Carlo Messina described the possibility of his making a higher takeover offer for UBI Banca SpA, a smaller Italian rival. But intense pushback from the target and some of its key domestic investors has forced the larger bank’s chief executive officer to change his tune.

A week before UBI shareholders are due to decide whether to sell their stock to Intesa, Messina has added a 652 million-euro ($747 million) cash sweetener to the all-share deal, boosting the total premium to about 45% when compared with UBI’s pre-bid valuation. That’s much better than the 28% or so that he’d offered in February.

Buying UBI still just about stacks up strategically and financially, but that bump in the price doesn’t leave a huge amount of room for maneuver if the takeover’s execution runs into difficulties, which is a risk in the febrile world of Italian banking.

At least UBI’s investors appear to be receptive. While the target’s management hasn’t yet commented on the new bid terms, some of the local shareholders who’ve been holding out for a better deal have signaled their intent to accept Messina’s increased offer.

Buying a smaller competitor won’t transform Intesa. The bigger bank’s 850 billion euros of assets dwarf UBI’s 125 billion euros. Nor will the deal help Intesa diversify away from Italy. But a merger will help it cut costs, which will in turn let Messina keep funding dividend payouts that have underpinned Intesa’s stock price. It trades at about 77% of its tangible book value, about twice the level of UniCredit SpA, its largest Italian rival.

Unfortunately for Messina, he needs the support of 67% of UBI’s shareholders to be certain he can fully merge the banks — hence the price hike. Analysts at Kepler Cheuvreux have estimated that as much as 30% of the deal’s proposed cost savings might be at risk without a full combination, even if Intesa secures more than 50% support. 

At the same time, Italy’s competition authority has demanded that Intesa sell more branches than originally envisaged after the deal, which will be hard to do without that two-thirds backing from UBI investors.

And while a combination makes sense, it shouldn’t be at any cost. European banks everywhere face an unknown hit from likely losses on their loans because of the Covid-19 pandemic. With Italian lenders particularly exposed to the small and medium-sized companies that have been crippled by the economic contraction, their capital risks being eroded. Analysts at Jefferies estimate that the cash addition to the UBI offer will still leave Intesa with a “comfortable” common equity Tier-1 ratio of 12.6%, but it leaves Messina with less wiggle room should losses increase.

What’s more, speculation has mounted that other Italian lenders are weighing their own deals and the country’s banking landscape could look very different in a year or two. The first movers in a wave of consolidation aren’t always the biggest winners.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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