UniCredit Is in Talks to Buy Paschi in First Orcel M&A Move

(Bloomberg) -- UniCredit SpA said it started talks to buy Banca Monte dei Paschi di Siena SpA, opening the way to the Italian government’s favored solution for the long-troubled lender.

UniCredit and the Finance Ministry “have approved the prerequisites” for a transaction involving the commercial operations of Paschi with a defined perimeter and appropriate risk mitigation, the country’s second-biggest bank said in a statement late Thursday.

A deal will ensure capital neutrality of the transaction, the exclusion of the bank’s bad loans and all the extraordinary litigation, as well as adequate protection from other potential credit risks, UniCredit said in the statement.

A purchase of Monte Paschi would mark the first major M&A move for Chief Executive Officer Andrea Orcel since taking over on April 15.

“This is positive for UniCredit, as the agreed prerequisites are aimed to insulate it and reduce/mitigate any risks,” Michael Christodoulou, an analyst at Berenberg, said in a note Thursday. “This development should be taken positively by the market tomorrow.” 

Orcel, a consummate dealmaker who in his previous career advised on some of Europe’s largest transactions, has been tasked with laying out a strategy for growth after doubts over UniCredit’s direction helped prompt the exit of former CEO Jean Pierre Mustier.

The executive said he’s seeking deals as one option to reach sustained higher profitability faster. M&A “is not a purpose in itself, rather it can be an accelerator and a potential improver of our strategic outcomes,” Orcel said during a conference call Thursday.

Troubled Bank

Siena-based Monte Paschi, the world’s oldest bank, has become a burden to the Italian state since it was first bailed out in 2009. By taking it on, UniCredit’s new CEO may also be signaling his readiness to reshape the Italian banking sector, which has been dogged by weak profitability and soured loans.

“During the due-diligence period, we will perform detailed analysis and assess whether we are able to design a transaction that can meet those agreed parameters,” Orcel said. “Then, and only then, will we have the elements to decide whether to proceed.”

Monte Paschi CEO Guido Bastianini and Chairman Patrizia Grieco said they welcomed UniCredit’s decision to start a review of Monte Paschi’s books for a takeover.

Talks with UniCredit for a possible takeover were halted earlier this year amid a government reshuffle and the exit of Mustier. During preliminary contacts between Orcel and the finance ministry’s representatives, the CEO set costly conditions for a purchase, according to people familiar with the matter.

As designed by UniCredit, the deal will allow the bank to “materially strengthen our competitive position in Italy and allow us to generate material synergies,” Orcel said.

Italy M&A

Orcel’s reach for domestic prizes continues an uptick in merger activity among Italian banks. Intesa Sanpaolo SpA’s takeover of smaller rival UBI Banca kicked off the season last year, followed by the takeover of Credito Valtellinese SpA by the Italian unit of Credit Agricole SA in April.

At the same time, the spurt in Italian M&A underlines the lack of action on a cross-border basis in Europe. Policy makers and executives have consistently emphasized the need for bank mergers to challenge the U.S. giants that have grabbed market share since the financial crisis.

Orcel said he aims to strengthen UniCredit and deliver risk-adjusted profitable growth with a goal of sustainable returns above the cost of equity. “This announcement may form part of that story,” he said.

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