Just when you thought it was finally dead, Banca Monte dei Paschi di Siena comes back to life. The story of this bank over the last decade has much in common with a bad horror movie. With UniCredit announcing its withdrawal from negotiations over the acquisition of the 500-year-old institution, there are clearly still more stomach-churning shocks to come.
The closest there is to an official reason as to why talks fell through is that Italy’s finance ministry couldn’t fulfil UniCredit’s pre-conditions for a transaction.
The two were €3 billion or more apart on how much the state would have to contribute to get the deal over the line. It seems the government, which took 70% of MPS in a 2017 bailout, wasn’t willing to go much further than the €2.5 billion MPS had already planned to raise next year in the absence of a merger.
Back in July, UniCredit chief executive Andrea Orcel had an air of triumph when he announced he had agreed pre-conditions with the government. The deal would exclude credit and legal risks, as well as southern Italian branches and the functions that UniCredit didn’t want, such as leasing and factoring, the core IT system, and MPS’s historic headquarters.
The deal was to be capital neutral for UniCredit and, most problematically, give UniCredit double-digit earnings-per share accretion.
Many think Orcel was never desperate to do the MPS deal, in part because he would prefer to buy Italy’s third-biggest bank, Banco BPM
But the biggest question – how much it would cost the Italian taxpayer – was left unanswered.
This was always going to be the sticking point, not least because the Italian state gave Intesa Sanpaolo €5.2 billion to take over the good bits of Banca Popolare di Vicenza and Veneto Banca in 2017. A year ago, Berenberg analysts estimated a similarly generous deal for UniCredit on MPS could cost the state as much as €14 billion.
Once UniCredit undertook due diligence during the summer, differing views on MPS’s asset quality emerged. Yet it is clear from sources on both sides that this wasn’t the only problem.
Rumours
One rumour – a view those close to the government are less willing to encourage – is that the state tried to reintroduce bits of the bank back into the deal, such as MPS’s leasing and factoring businesses. This was because of pushback from other state entities slated to take them on. The treasury then wouldn’t agree to the price UniCredit subsequently offered for these assets.
Of course, there was always room for debate over valuations. If one thing fundamentally changed since July, however, it was the heightened politicization of the deal, fuelled by a by-election in Siena in early October.
Rather uncomfortably, the election was to replace Pier Carlo Padoan, the finance minister who nationalized MPS and who stepped down as member of parliament for Siena a year ago to become UniCredit’s chairman.
The seat was so important to Padoan’s old party, the centre-left Partito Democratico, that it put forward its leader, Enrico Letta, to defend it. Although Letta won, he was not willing to support the UniCredit deal.
The opposition candidates were successful in magnifying the sorry fate of MPS, a big local employer, which made it less feasible for the government, which the PD supports, to offer a generous deal to UniCredit.
This could have been seen as favouring private interests – UniCredit being represented, of course, by Orcel, a famously wealthy former investment banker.
All this made MPS look less attractive to UniCredit, including by making its desired MPS job cuts potentially more expensive, even if just in reputational terms. It became harder for Orcel to do the deal, and more advantageous to back out.
“The fact that Andrea is able to step back proves he’s a market man and not just a deal maker,” claims a source close to the bank.
Now what?
The question is what happens now. Many think Orcel was never desperate to do the MPS deal, in part because he would prefer to buy Italy’s third-biggest bank, Banco BPM.
The main reason the government would have offered support for a UniCredit/MPS takeover is to beat next year’s European Union deadline for the state to exit the bank.
Meanwhile, one source familiar with the government’s thinking says the approach at MPS now will be to carry on as if the UniCredit deal were going ahead, but on a standalone basis. This is based on the rationale that there is a viable underlying business and that the EU will probably agree to extend the deadline for its privatization if MPS steps up its own restructuring.
The legal- and credit-risk carve outs will therefore go ahead, as will the planned capital raise, with the government stumping up most or all of it. Perhaps most importantly, much of the 4,000 additional job cuts that UniCredit envisaged will go ahead too, albeit with the blame now attached less to UniCredit and more to the EU.
