(Barkha Babbar & Giorgio Curti)
Given the fragmented nature of the Italian banking system, Italy’s largest retail lender, Intesa had proposed a hostile takeover of its smaller rival UBI Banca on February 18th, in an effort to trigger further consolidation within the banking industry.
UBI is predominantly based in the industrialised north of Italy and therefore its customer base has been hard hit by the coronavirus outbreak. Given the large market coverage Intesa benefits from and the relatively greater assets it holds compared to UBI, this deal seems particularly attractive as it may be able to pull UBI out of a banking system heavily impacted by the global pandemic.
The Offer
Initial Proposition
In February of 2020, Intesa Sanpaolo, Italy’s largest retail banker had launched a €4.9bn hostile takeover bid to acquire their banking rival UBI Banca, in an effort to increase earnings through cost cuts and primarily focus on the wealth management and insurance business. This acquisition would create the seventh largest bank in the Eurozone with €1.1 trillion in assets.
Controversies
However, earlier this month, UBI had rejected this offer in concerns that the offer was too low and could be harmful for UBI’s shareholders. The chief executive of UBI Banca had reportedly described this takeover bid as “anti-competitive” and said that it “would create a kind of monopoly”, one that is not very appropriate. In order to mitigate this risk, Intesa has offered to allay concerns about lack of competition by agreeing to sell 532 of their combined branches to BPER Banca and has declared itself open to selling another 17 branches to a different bank within 9 months if necessary.
Other concerns over this takeover bid included that the value of this offer was inadequate and penalised the shareholders of UBI to a greater extent compared to the shareholders of Intesa. UBI investors claimed that the deal represented unnecessary risk due to the lack of a cash component.
Synergies
Intesa acquiring UBI, Italy’s third largest bank, would provide Intesa with additional 3 million retail, small business and private banking clients. Intesa has forecasted that the deal could lead to €730m in annual synergies and it could cost €1.3bn before tax to execute. Moreover, Intesa had claimed that the value and synergies of the initial takeover bid for UBI Banca are higher than those estimated by the UBI’s board.
Revised Proposition
Moreover, not only has Italy been strongly hit by the global pandemic, which has resulted in a heavily fragmented banking sector, but UBI specifically is highly exposed in Lombardy, the Italian region that has suffered the worst impact from coronavirus. Intesa has recently claimed that they want to provide UBI shareholders with some stability. Just this week, Intesa Sanpaolo has increased its bid for UBI by adding a cash sweetener in order to persuade UBI inventors to tender their shares. The improved offer values UBI Banca shares at €4.82, which represents a 44.7% premium on UBI’s February share price.
The deal comprised of an increase in its takeover bid for UBI by 18% and all UBI shareholder would receive 1.7 newly issued Intesa shares. Intesa claims that by becoming the seventh largest bank in the eurozone, this improved offer will be able to support the areas most impacted by the coronavirus pandemic where UBI is predominantly rooted.
Talks of the deal this week has caused the shares of Italian banks to surge, increasing prospects for the nation’s economy. UBI’s shares were up 13% on the day the present report was written (July 20th), as a group of shareholders holding 18% of the bank’s stock said they would accept Intesa’s revised offer.
State of the Italian banking system
The Italian banking system is still recovering from the severe conditions witnessed over the last decade, in the aftermath of the global financial crisis. Such a long critical period for the system was not only due to the economic downturn and growth stagnation in Italy, but also to other factors such as all-time low interest rates, substantial deterioration and downgrading of credit, technological disruption and requests of recapitalisation of banks from Italian regulators. One of the lowest points of the Italian banking system crisis took place when the government stepped in to bail out the historic Monte dei Paschi di Siena, whose control is now in the hands of the Italian Ministry of the Economy and Finance.
Before the Covid-19 outbreak, indicators of financial health such as capital ratios, as well as efficiency ratios, were improving. Even more importantly, credit quality was also improving across the market, leading to a stabilisation of the cost of risk for banks.
A desirable acquisition
The Italian banking system is particularly fragmented, with numerous small local banks representing a large part of the market. This was widely recognised over the past few years as one of the weaknesses of the system as a whole, as small banks are less capable of withstanding crises. Furthermore, they are normally unable to lend sufficient funds for relatively large investments, which could have contributed to faster economic recovery and growth in the country over the last decade. In this regard, some analysts and economists consider the acquisition to be potentially beneficial for the Italian banking system, which could find renewed strength and instil confidence in the markets.
Prediction
When considering the proportion of UBI’s capital which shareholders have so far agreed to hand over to Intesa, success for the offer seems possible.
For the offer to technically be successful, Intesa needs 50% plus one share of UBI’s capital. If more shareholders are lured by the revised offer and if success for Intesa starts coming across as likely, even more shares could be sold to Intesa, making the acquisition easier.
However, Intesa stated that the transition would only be efficient if 66.67% of UBI’s capital were to be acquired. It now looks unlikely for Intesa to reach this ideal share of UBI’s capital before the 28 July, unless the majority of shareholders decide to accept the offer in the next few days.
Therefore, with much depending on shareholders’ sentiment, our prediction is that Intesa will probably manage to take control of more than 50% of UBI’s shares, but it will fall short of its aim of 66.67% of capital acquisition. In that case, it will be interesting to see what Intesa’s next steps will be.
Definitions:
Acquisition: When one company purchases most or all of another company’s shares in order to gain control of the company, typically comprises purchasing more than 50% of the shares.
Monopoly: When a company dominates a sector or industry.
Capital ratio: the ratio of a bank’s capital to its total assets
Credit quality: evaluation of the credit risk of a prospective debtor, predicting their ability to pay back the debt
Resources
- Cicioni, G. (2019). L’evoluzione del sistema bancario italiano. KPMG Italy. Available at: https://home.kpmg/it/it/home/insights/2019/02/l-evoluzione-sistema-bancario-italiano.html
- Barbagallo, B. (2018). Il sistema bancario italiano: situazione e prospettive. Associazione per lo Sviluppo degli Studi di Banca e Borsa – Università Cattolica del Sacro Cuore di Milano. Available at: https://www.bancaditalia.it/pubblicazioni/interventi-vari/int-var-2018/Barbagallo-20180324.pdf
- Sciorilli Borrelli, S. (2020). UBI Chief says takeover by Intesa ‘would create kind of monopoly. Financial Times. Available at: https://www.ft.com/content/4788c0b2-96a1-4c25-bcdd-ac6fb6595219
- Za, V. and Mandalà, A. (2020). Intesa maintains profit goal even if unable to merge with UBI. Reuters. Available at: https://uk.reuters.com/article/us-ubi-m-a-intesa-sanpaolo/intesa-maintains-profit-goal-even-if-unable-to-merge-with-ubi-idUKKBN23X26F
- Mandalà, A. (2020). Italy’s UBI says Intesa sale of branches would put deal objectives at risk. Reuters. Available at: https://uk.reuters.com/article/uk-ubi-banca-m-a-intesa-sanpaolo-branche/italys-ubi-says-intesa-sale-of-branches-would-put-deal-objectives-at-risk-idUKKCN24I29R
- Mandalà, A. and Semeraro, G. (2020). Italian bank shares surge as Intesa bid fuels merger expectations. Reuters. Available at: https://uk.reuters.com/article/uk-italy-banks/italian-bank-shares-surge-as-intesa-bid-fuels-merger-expectations-idUKKCN24L1G2
- Sirletti, S. (2020). UBI Says Intesa Takeover Bid Doesn’t Reflect Bank’0s Value. Bloomberg. Available at: https://www.bloomberg.com/news/articles/2020-07-03/ubi-says-intesa-takeover-bid-doesn-t-reflect-bank-s-value
- Morris, S., Massoudi, A. and Fletcher, L. (2020). Intesa Sanpaolo launches €4.9bn bid to buy Italian banking rival UBI Banca. Financial Times. Available at: https://www.ft.com/content/3ecbafc6-51e7-11ea-8841-482eed0038b1
- Sciorilli Borrelli, S. (2020). Italy’s antitrust regulator warns Intesa over UBI takeover. Financial Times. Available at: https://www.ft.com/content/7caa10f8-1e8b-43f4-8bdf-1b56436f1971
- Sciorilli Borrelli, S. (2020). Intesa Sanpaolo sweetens bid for UBI. Financial Times. Available at: https://www.ft.com/content/79697d9d-38f9-4340-af2f-ce207f619274
Featured Image Source: Grattacielo Intesa SanPaolo
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