(Bloomberg) -- Some of UniCredit SpA’s main investors support a full takeover of German rival Commerzbank AG, saying such a move would add value for shareholders.
An outright acquisition makes strategic sense because UniCredit is already present in Germany and would become the country’s top lender through a deal, according to two investors who asked not to be named because they weren’t authorized to speak.
Both praised Chief Executive Officer Andrea Orcel for building a Commerzbank stake in a way that has very few downside risks. While Orcel has often spoken with shareholders in generic terms about possible acquisitions, the investors said they didn’t see his move coming.
UniCredit shocked markets this week by disclosing it had built a 9% stake in the German lender and was considering a full takeover as one option. The move, a week after Germany announced its intention to sell down its remaining holding in the lender, took Berlin by surprise and prompted Commerzbank to hire advisers to explore options, including for a defense.
The Italian bank’s shares are up this week, suggesting plenty of investor backing for the gambit. As of June, around 75% of UniCredit shareholders were institutional investors like BlackRock Inc., 13% were retail and 6% sovereign wealth funds, according to the company’s website.”
The UniCredit investors said the way Orcel managed to build the stake quickly and quietly now positions him to seek talks with all stakeholders, while he remains flexible if those discussions don’t immediately lead to agreements.
Both banks complement each other so that a combination would create savings, higher returns and a top presence in the German market, the two investors said. It also brings with it control of a major bank in Poland, where UniCredit wants to grow, they said.
One of them, with a more than 2% stake in UniCredit, is convinced that a merger won’t affect UniCredit’s dividend policy, expecting that a combination would be done with a mix of equity and excess cash. The investor would consider a 35% premium on Commerzbank’s share value before the announcement as fair in a full takeover.
What Bloomberg Intelligence Says:
A hypothetical takeover of Commerzbank by UniCredit could create a €78 billion behemoth and give the latter a 10% EPS boost, while improving its asset quality ... We assume 15% in savings could be extracted from the combined cost base of HVB (UniCredit’s German arm) and Commerzbank.
— Philip Richards, senior bank analyst
To read the full research note, click here.
Orcel is sitting on as much as €10 billion for potential acquisitions, having reaped the benefits of higher interest rates while cutting costs. Commerzbank currently has a market value of about €18 billion, up from around €15 billion before UniCredit unveiled its stake.
While any value creation will depend on the terms of a deal and the requests by regulators, one of the investors estimates at least €2 billion in savings from a merger, and an internal rate of return — a key metric to estimate the profitability of an investment — above 20%.
The other investor pointed to the ability of Orcel, one of the most prolific dealmakers in Europe, to negotiate, arguing that time plays in his favor because UniCredit is in no rush to reach an agreement.
Bond Prices
Bond investors are starting to bet Orcel might pull off a takeover. The borrowing costs of the two major European lenders are converging, a sign that they are beginning to price in a deal.
Two investors who hold Commerzbank’s Additional Tier 1 bonds, a risky type of debt that lenders issue for regulatory reasons, said that bets on a takeover going through were responsible for a flurry of trading around both names. They asked not to be identified on their holdings.
While plenty of obstacles remain to a deal, Orcel said in an interview Thursday that UniCredit remains open-minded with regard to what happens next.
“We may go up, we may go down, and we may combine,” Orcel said. “We are very patient.”
--With assistance from Tasos Vossos and Abhinav Ramnarayan.
(Adds details of bond trades in 12th and 13th paragraphs.)
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