Italy Sounded Out UniCredit on Potential Paschi Stake Sale

(Bloomberg) -- Italy has asked UniCredit SpA executives if they would be interested in buying the government’s majority stake in Banca Monte dei Paschi di Siena SpA, according to people with knowledge of the matter.

Informal contacts have been made and Italy’s Finance Ministry sees a UniCredit deal as a possible way to exit its majority holding in the bailed out lender, the people said, asking not to be identified because the matter is private. The discussions were preliminary and the ministry is weighing a range of options, they said.

UniCredit Chief Executive Officer Jean Pierre Mustier won’t consider any deal that isn’t at least capital neutral and that doesn’t shield the bank from legal risks, some of the people said. UniCredit has also conducted an internal analysis of a possible combination, they said. Representatives for the ministry, UniCredit and Monte Paschi declined to comment.

European governments have turned to their stronger banks to help absorb struggling lenders as pressure from slow economic growth and low interest rates persists. Italy arranged for Intesa Sanpaolo SpA to take over assets of two failing Veneto-based banks in 2017 and Spain’s government helped Banco Santander SA absorb Banco Popular the same year to avoid its collapse.

UniCredit fell as much as 2% in Milan trading and Monte Paschi gained as much as 1.7%.

While UniCredit’s CEO has repeatedly said that Milan-based bank isn’t interested in mergers or acquisitions, some analysts have highlighted mounting pressure on the lender after rival Intesa added scale in Italy with the acquisition of Unione di Banche Italiane SpA.

M&A Appetite

The discussions come as European banking M&A is starting to pick up after years with few if any transactions. Spain’s CaixaBank this month agreed to buy Bankia SA to create Spain’s largest domestic lender. Smaller Spanish rival Banco de Sabadell SA said it’s exploring strategic options including a sale or merger or buying a smaller competitor.

Getting state-backed deals over the line has required careful negotiations with European Union officials to avoid violating rules that restrict government aid to the financial industry. Italy has already held extensive talks with the EU over the transfer of billions of euros of Monte Paschi’s bad loans to a state-controlled asset manager.

A deal that is at least capital neutral could could be a robust test of the badwill concept in banking M&A, Bloomberg Intelligence analyst Jonathan Tyce wrote on Tuesday.

Badwill Boost

Badwill, or negative goodwill, is a gain generated when one company purchases another at less than its market value. The ECB has said that the accounting quirk should be used to increase reserves for bad loans, shoulder costs from the merger and make other investments. The gains shouldn’t be paid out as profits to shareholders until the new bank’s business model is sustainable.

Monte Paschi, founded in 1472, was bailed out in 2017, and the government ended up with a 68% stake which it agreed to sell as part of a deal with European regulators. The state is looking to dispose of its stake in Monte Paschi by the end of next year and Finance Minister Roberto Gualtieri has signed off on a draft decree which authorizes the sale.

Rome could begin a disposal or merger process for Paschi after completing a complex transaction that would allow it to move more than 8 billion euros ($9.5 billion) of soured debt to state-owned asset manager Amco.

Still, Monte Paschi’s total legal risk amounts to about 10 billion euros, as civil and criminal cases related to its former management have dogged the Siena-based lender since the rescue. That risk is seen as a significant impediment to any deal to take the bank out of government hands.

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