Breakingviews - Political meddling changes euro-bank M&A playbook

Reuters

8 hours ago

LONDON, June 30 (Reuters Breakingviews) - Is major bank M&A politically possible in Europe? That's what dealmakers and CEOs across the continent are wondering after politicians in Berlin, Madrid and Rome erected obstacles to some 60 billion euros ($70 billion) worth of possible deals. The takeaway from the recent flurry of activity is that bank takeovers can still happen, but dealmakers and bidders may need to refine their tactics.
After a quiet decade for tie-ups between European lenders, BBVA (BBVA.MC), opens new tab Chair Carlos Torres Vila fired the starting gun last April with a share-based bid for 14-billion-euro Banco de Sabadell (SABE.MC), opens new tab. Then, in September, UniCredit (CRDI.MI), opens new tab CEO Andrea Orcel snapped up a stake in 30-billion-euro Commerzbank (CBKG.DE), opens new tab as a prelude to a possible takeover, before launching an unsolicited all-share offer for Banco BPM (BAMI.MI), opens new tab, currently worth 15 billion euros.
All three situations were effectively hostile, and at least two of them now seem likely to go nowhere. Orcel has accepted that his BPM hunt may have ended, after Rome handed down painful conditions, including selling his Russian business and maintaining the target's loan-to-deposit ratio. Equally, his Commerzbank tilt seems over for now after Chancellor Friedrich Merz's recent criticism of what many in Germany saw as a hostile raid.
BBVA's planned takeover of Sabadell, meanwhile, is looking increasingly complicated. The Spanish government, ostensibly fearing job losses and fewer small-business loans, last week said, opens new tab 70-billion-euro BBVA could not integrate its target for three to five years if it goes ahead with a deal. That pushes out some of the 850 million euros in planned cost savings, making it harder for Torres to raise his bid, which seems necessary since the current offer looks low.
It would be rash, however, to conclude that governments simply don't want bank deals to happen. Some tie-ups are proceeding without drama, including BPCE's recent purchase of 6-billion-euro Novo Banco. That deal, with a French buyer, works for Portugal because Lisbon is worried about Spanish dominance of its financial system and has no reason to fear the Gallic interloper. And Italy's government seems to have no issue with Banca Monte dei Paschi di Siena's (BMPS.MI), opens new tab hostile 15-billion-euro Mediobanca (MDBI.MI), opens new tab play, made in January. That may be because it aligns with Rome's mission of creating a third major bank to rival twin 90-billion-euro giants Intesa Sanpaolo (ISP.MI), opens new tab and UniCredit. The common thread is that the deals that seem more probable also seem to fit a pre-existing government agenda.
Some deals will always be politically tricky. Spanish Prime Minister Pedro Sánchez, for example, relies on support from politicians in the Catalan region, where Sabadell has a deep history. That made it unlikely that his government would look kindly on a takeover of the smaller lender. Rome, meanwhile, doesn't seem to want either of its banking behemoths to get bigger domestically. And Berlin has always been sensitive about the perceived risk of its banks being infected by supposedly riskier southern European rivals stuffed with Mediterranean government bonds. Those aren't necessarily good reasons to oppose M&A, but for dealmakers they're a fact of life.
Still, some of the bidders' tactics haven't always helped. Orcel continued upping his exposure to Commerzbank, through derivatives, even after his initial approach met opposition. That gave German politicians an easy way to kick a potential deal without even debating its merits.
And both Orcel and Torres adopted a hard-nosed approach to valuation and returns which, while justifiable from their own shareholders' perspective, made it easier for their targets to resist. UniCredit's BPM offer came with a scant 0.5% premium. Meanwhile Torres, for now, is sticking with a price that represents effectively no premium after accounting for the overall rise in Spanish bank shares since last April, even though the target's earnings forecasts have risen more than its rivals. BPM and Sabadell are trading some 1% and 6% respectively above the offers, suggesting that investors either expect a bump or judge the targets' standalone prospects to be more valuable than the bids.
The charitable telling is that BBVA and UniCredit had to force the issue to get a hearing, given the target boards' likely recalcitrance. Yet from governments' perspective, hostile campaigns can seem destabilising in a highly sensitive sector, raising the odds of intervention. Rome, Berlin and Madrid would probably be less likely to meddle in deals that both acquirer and target have already agreed. Having a relatively low bid on the table, or none at all in the case of Commerzbank, also means the targets' boards don't have to worry about angry phone calls from investors eager to get their hands on a juicy premium.
So one lesson for future would-be acquirers, like 60-billion-euro Dutch lender ING (INGA.AS), opens new tab, is that hostile deals should only be a very last resort – and may even be more hassle than they're worth. The alternative is to try harder to offer to share more of the merger goodies upfront to win target boards over, with a higher price. That may ultimately mean lower returns than the 15% or so that Orcel was targeting in his deals. The good news, however, is that bank takeovers typically generate larger synergies than bidders typically expect. Intesa, for example, initially pencilled in about 700 million euros of annual cost savings from buying UBI Banca, but raised that number to over 1 billion euros in 2021.
Of course, a more generous approach does not guarantee that politicians will stay out of the picture. Dealmakers may simply need to learn to live with a more interventionist state. From now on, getting deals done will require more diplomacy – and financial generosity.
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