(Bloomberg Opinion) -- Italian banks embarking on a round of consolidation was always a matter of when, not if. Meager profitability, a fragmented industry and a desperate need for investment are obvious ingredients for M&A. Lenders have rid themselves of most of the bad loans that crippled Italy’s banks after the financial crisis, so dealmaking should be unhindered.
Intesa Sanpaolo SpA’s surprise $5.3 billion offer for a smaller Italian rival in a four-way carve-up may not have been what investors had in mind. Intesa is already Italy’s biggest bank and its target, Unione di Banche Italiane SpA — the country’s fourth-largest — was seen as more of an acquirer of weaker rivals than a target.
But the deal may provide the jolt the European industry needs. Almost a year has passed since the failed effort to combine Germany’s Deutsche Bank AG and Commerzbank AG through a more complex, risky deal. The completion of a simpler union could embolden chief executives elsewhere in the continent too.
Intesa’s unsolicited all-stock bid, at a 25% premium to the closing price, would make it one of the biggest European banking mergers since the Lehman crisis. UBI, which hasn’t commented on the approach, was caught off guard. Just hours earlier in London, it presented its strategy as a standalone company.
A deal would move Intesa into the group of top 10 European lenders, measured by operating income. Though UBI investors could argue for juicier terms, the strategic and financial rationale for a deal is compelling. The European Central Bank’s initial positive feedback on the merger should improve Intesa CEO Carlo Messina’s chances of persuading his UBI counterpart.
A takeover would create a joint business with a market share of about 21% in loans and deposits, 23% in asset management and 19% in life insurance. To avert antitrust concerns, Intesa has agreed to sell as many as 500 branches to a regional lender and to dispose of insurance activities too. The banks have similar business models and the 5,000 anticipated job cuts are expected to be voluntary (3,400 job losses have already been announced by the banks).
The deal would bring 510 million euros of cost savings and 220 million euros of revenue synergies, according to Intesa. The buyer is promising to pay a cash dividend of 0.2 euros per share for 2020, and higher from 2021, above current consensus estimates. To cover the deal’s cost, Intesa expects to benefit from about 2 billion euros of negative goodwill to help pay for integration expenses and a deeper clean-up of bad loans.
Investors like what they’re hearing. A bond UBI sold five weeks ago has delivered an impressive 12% return, making it the best-performing bond in Europe this year. UBI shares rose as much as 29% on Tuesday, above the offer price; Intesa shares rose as much as 3.6%.
Some investors had hoped that Intesa would make a bolder move to diversify its business away from Italy and to reduce its reliance on lending income. But support from the ECB for the UBI approach would at least show the regulator is willing to countenance much-needed M&A in Italy, and Europe.
Messina’s unexpected move might inspire a broader consolidation. As sub-zero interest rates persist and economies sputter, European banks’ low profitability is unlikely to improve. Cross-border deals are still complicated by different national insolvency laws and the absence of a common European deposit-insurance scheme. At least Messina is doing something.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
This column does not necessarily reflect the opinion of 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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