(Bloomberg) -- This summer, the German government appeared ready to finally reduce its stake in Commerzbank AG. It was a moment Andrea Orcel, chief executive officer of UniCredit SpA, had also been anticipating.
On Wednesday, UniCredit revealed that it now owned 9% of Commerzbank, adding all the shares Berlin offered this week to a position it had quietly built in the market in recent weeks when speculation of a possible sale mounted. Many in Germany were caught flat-footed by the move.
Orcel has long viewed Commerzbank as a possible target in the right conditions. He’s spent three years scouting for a transformative deal for Italy’s UniCredit, which he once advised on deals and now runs. While this week’s minority stake is only the first step, Orcel’s ultimate goal is to pull off a full takeover of Commerzbank, even if that may take time. UniCredit has already canvassed shareholders to see if there is room for talks.
Details of Orcel’s approach, and the responses to it so far, are based on interviews with seven people familiar with the process, who asked not to be named given the sensitivity. A spokesperson for UniCredit declined to comment.
For now, UniCredit’s stake puts it in a comfortable position against other potential buyers of Commerzbank. And if he can go further, Orcel will oversee the biggest bank by revenue in Germany and open the door to the long-awaited international consolidation of Europe’s fragmented banking system, which is a source of frustration among regulators and lawmakers hoping to reignite the region’s economy.
“Europe needs banks with market capitalizations ahead of $100 billion if we want this economic bloc to hold vis-à-vis the US or China,” Orcel told Bloomberg Television last November.
As markets closed on Wednesday, UniCredit was worth about €59 billion ($65 billion) and Commerzbank reached €17.4 billion. The shares were up 1.3% at 9:12 a.m. Thursday in Frankfurt.
German Toehold
Orcel has been open about his dealmaking ambitions at UniCredit. Early into his tenure, he backed out of an agreement to acquire the Italian government’s stake in Banca Monte dei Paschi di Siena SpA, but last year picked off Greece’s holding in Alpha Bank. This time, the German state’s disposal of Commerzbank shares created an opportunity too good to miss.
Berlin, which owned 16.5% of Commerzbank due to a bailout, tipped off potential buyers last week by announcing plans to sell down. Early marketing suggested lukewarm interest in the shares at between €12.48 and €12.60.
Then UniCredit made a “fill or kill” order for the entire 4.5% stake available. The German government arm running the process turned to the finance ministry for guidance. With the Italian lender outbidding everyone else, Germany had little choice but to sell it the whole tranche and secure €13.20 per share for the public purse.
Orcel made a courtesy call to Commerzbank on Wednesday, without raising strategic issues such as a potential takeover, Bloomberg has reported. Commerzbank CEO Manfred Knof is planning to leave when his contract expires at the end of next year, adding a further wrinkle to any strategic planning.
UniCredit informed the government’s advisers of the stake it had amassed before offering to buy the entire bookbuild this week. The European Central Bank was also kept informed as early as the summer. The ECB declined to comment.
Hans-Peter Burghof, chair of the banking and finance department at the University of Hohenheim in Stuttgart, isn’t expecting much resistance to Commerzbank’s new shareholder.
“They’re paying more than the market price, the money is needed and they have strategic intentions. The government will be happy to have the money,” he said by phone. “The tough debate comes when and if they decide to expand this toehold.”
This would raise questions around jobs and the services available to Germany’s mid-sized companies if Commerzbank and UniCredit’s local unit known as HypoVereinsbank were to join forces, just in time for federal elections next year. One labor union has already raised concerns.
Orcel, incidentally, acted as UniCredit’s adviser when it bought HVB back in 2005. Two years later, he helped Royal Bank of Scotland take over ABN Amro, an ill-fated purchase that helped snuff out all but emergency dealmaking in the financial crisis that followed.
Germany still has a patchwork of smaller retail banks, which could lessen concerns around competition from any deal. “Depending on how you slice it, the savings and cooperative banks have about half the market here,” Peter Barkow, founder of Barkow Consulting, said in a telephone interview. That means the impact of two big banks merging would be “much more limited,” he said.
Merger Benefits
At European level, policymakers have long favored a banking tie-up that could champion the region’s economy and bolster the euro area on the global stage.
Mergers “can be a means of addressing issues in certain market segments or jurisdictions, such as low profitability and overcapacity,” Kerstin af Jochnick, member of the supervisory board of the ECB, said at a conference in June. “But in the end, this is a call the markets need to make. We see bank consolidation as being a market-led process.”
European regulators have made little progress on hurdles to cross-border deals such as difficulties in moving funds between countries. UniCredit has experience of this with HVB, which sent €1.7 billion to its parent via dividends for last year, according to its annual report.
This year, there have been signs of the broader deal market thawing after a pause during the Covid-19 pandemic. Some European banks such as UniCredit are trading above their book value, making share buybacks less attractive and M&A a better prospect for shareholders.
BBVA is in the process of taking over Spanish rival Banco Sabadell — though this is a hostile bid, in contrast with UniCredit’s more measured approach. While BBVA is tied up with its transaction for months, UniCredit can hold its Commerzbank stake with relatively little downside.
BNP Paribas SA, the most valuable bank in the euro area and a potential dealmaker thanks to an $8 billion cash pile, opted instead to bet on asset management by agreeing to buy a unit of Axa SA in August.
One piece of merger math that Orcel would have to consider is that when banks get bigger and more complex, their capital requirements tend to rise. That can limit the amount of money that can be used for new loans or shareholder dividends.
The ECB provided some relief on that front in 2022 when it convinced international regulators that cross-border exposures within Europe’s banking union can be viewed as domestic ones, which are considered less risky.
Whether Orcel can convert his ambitious swoop into a full-blown takeover is an open question: Commerzbank’s executive board is reviewing its defense strategy. But the move is already paying off. Commerzbank shares rose around 17% on Wednesday, adding hundreds of millions to the value of UniCredit’s stake.
--With assistance from Steven Arons and Nicholas Comfort.
(Updates with Commerzbank shares in seventh paragraph)
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