Andrea Orcel has scope to soften his Commerz raid
The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to fix typo in first paragraph.
By Liam Proud
LONDON, Sept 23 (Reuters Breakingviews) -UniCredit CRDI.MI boss Andrea Orcel is no stranger to playing hardball. The former Merrill Lynch banker advised Royal Bank of Scotland on the hostile 2007 breakup of ABN Amro, for example. Yet even for him, it’s aggressive to snap up 11.5% of state-backed German lender Commerzbank CBKG.DE just days after an initial 9% purchase met a cool reception from the target and its government. The raid requires softening, and Orcel has ample room to do so.
Italy’s UniCredit said on Monday that it had entered into derivatives contracts which, if exercised, would take its overall holding in 19-billion-euro Commerzbank to roughly 21%. The exposure, which uses contracts known as total return swaps according to a person familiar with the matter, is mostly hedged, meaning that Orcel could in theory get out of the position without suffering huge losses from offloading such a large block of shares.
Everything about the latest move will go down badly in Germany, whose Finance Agency on Friday noted Commerzbank’s preference for staying independent and said it would hold on to the government’s remaining 12% stake. Unionists, politicians and the Frankfurt-based target itself have opposed the idea of a UniCredit takeover. Fears include job losses and the possibility that an Italian-owned lender would be less committed to funding small and medium-sized German companies. And Orcel’s use of derivatives will allow critics to argue that UniCredit is simply an opportunistic aggressor rather than a committed, long-term investor in Commerzbank.
There’s scope to calm things down. A full takeover would be extremely lucrative for UniCredit, mainly because Commerzbank itself is trading at such a depressed price. Assume Orcel pays a 30% premium to the German bank’s undisturbed price and the total outlay would be around 19.4 billion euros. Since analysts reckon Commerzbank will pump out 2.8 billion euros of earnings in 2027, Orcel could pocket a 14.6% annual return on investment even assuming no cost savings.
That might seem like a poor outcome, given bank mergers allow acquirers to take out expenses equivalent to perhaps 30% of the target’s cost base. In Commerzbank’s case, that would imply some 1.7 billion euros of synergies, pushing the return on investment to almost 18%, according to Breakingviews calculations that assume restructuring costs equivalent to twice the value of annual savings.
Yet UniCredit’s minimum required return is only 15%, according to a person familiar with the matter, so Orcel can afford to forego some savings to woo unions and politicians. Examples could include ruling out forced redundancies for several years and boosting lending to German Mittelstand companies.
There’s no guarantee that it would work. But the status quo was hardly working either. UniCredit had snapped up roughly a tenth of Commerzbank but wasn’t getting meaningful engagement from the target’s board, according to a person familiar with the matter. Orcel has at least made himself harder to ignore. Now it’s time to make himself easier to like.
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CONTEXT NEWS
UniCredit on Sept. 23 said that it had bought a further 11.5% of Commerzbank through derivatives, taking its total potential holding to around 21%. The new financial instruments will only turn into shares once the Italian bank exercises the contracts, which it said it would not do until it had received regulatory approval to cross the 10% ownership threshold.
UniCredit said that it had hedged most of its economic exposure so that it could offload its holdings at a minimum price, or add to it, depending on “the outcome of engagement with Commerzbank, its management and supervisory boards as well as its wider stakeholders in Germany.”
The Italian lender said on Sept. 11 that it had bought 4.5% of Commerzbank from the German government and roughly the same amount again through market transactions, giving it a roughly 9% stake at the time.
Germany’s Finance Agency, which manages the country’s remaining 12% holding on behalf of the government, said on Sept. 20 that it would not sell any more shares for the time being.
Shares in Commerzbank were flat as of 1052 GMT on Sept. 23, having been down roughly 5% earlier in the day.
Graphic: UniCredit’s juicy possible Commerzbank M&A returns https://reut.rs/3XSCFnZ
Editing by Neil Unmack and Oliver Taslic
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