UniCredit’s Orcel could still sweeten his bid and mount a double M&A strike.

Analysts say there is still room for UniCredit’s Andrea Orcel to sweeten his bid for Italy’s Banco BPM, split between two takeover courtships, while political turmoil has delayed a deal with Germany’s Banco BPM. Commerzbank.

Orcel, which was a key architect of the controversial 2007 takeover of Dutch bank ABN Amro and its subsequent breakup, revisited its ambitions for cross-border integration with Commerzbank’s surprise stake-building announcement in September. Until recently, the latter had been the subject of speculation as a potential merger partner for Germany’s largest lender, Deutsche Bank.

Amid resistance from the German government and uproar from Chancellor Olaf Scholz’s ruling coalition, UniCredit also diverted a 10 billion euro ($10.5 billion) offer to Banco BPM last month, which an Italian colleague said was delivered on “unusual terms.” It does not reflect profitability and growth potential.

In the process, Orcel has earned himself a frown from the Italian administration, with Economy Minister Giancarlo Giorgetti warning that “the safest way to lose a war is to engage it on two fronts,” according to Italian news outlet Ansa.

Analysts say UniCredit, whose CET1 ratio, which reflects the bank’s financial strength and resilience, has been above 16% for the first three quarters of the year, can still improve its domestic bid.

“There is room to increase the (Banco BPM) offering,” Johann Scholtz, senior equity analyst and Morningstar, told CNBC.

But he warned that space to do so was “limited.” “If you think of anything more than a 10% (increase), it’s probably going to dilute shareholder returns.”

UniCredit’s initial offer was for an all-stock deal to merge two of Italy’s largest lenders, but it was worth just 6.657 euros per share.

Filippo Alloatti, senior credit analyst at Scholtz and Federated Hermes, said UniCredit could make its offer better by adding a cash element.

“Remember, it’s Orcel’s second attempt to buy (Banco) BPM. I don’t think there will be a third attempt. I think they’ll either get a deal done now or maybe he’ll walk, so I guess that’s what I’m thinking,” Alloatti told CNBC. “We think a cash element could be on the table,” Orcel said last month, labeling Banco BPM a “historic target” following media reports that UniCredit had previously sought a domestic union in 2022. It triggered it.

The Italian scene was primed for M&A activity after Banco BPM acquired a 5% stake in Monte dei Paschi, the world’s oldest lender and another previous acquisition target of UniCredit, early last month. Negotiations broke down in 2021 when Rome sought to reduce its stake. From a bank that was bailed out.

Scholtz said UniCredit’s offer “puts (Banco) BPM in a difficult position” and could trigger passivity rules that would block any action that could stymie a bid without shareholder approval and stifle Banco BPM’s takeover ambitions in early November. I pointed out that there is. Control of fund manager Anima Holding, which owns a 4% stake in Monte dei Paschi.

A consolidation offensive may be UniCredit’s best defense in a easing interest rate environment.

Due to “multi-year restructuring, balance sheet de-risking and substantially improved loss absorption capacity,” UniCredit received a BBB+ long-term debt rating from Fitch Ratings last October, which is higher than the Italian government bond rating.

But lenders will now have to contend with an environment of easy monetary policy that leaves them “more exposed to interest rate changes due to their relatively limited presence in asset management and bancassurance,” Alessandro Boratti, an analyst at Scope Ratings, wrote last month.

Both acquisition prospects hedge some of that exposure. The combination of Germany’s Commerzbank, where UniCredit operates through its HypoVereinsbank unit, could create synergies in its capital markets, advisory, payments and trade finance activities, JPMorgan analysts said in a November report. They added that such a combination would offer “limited” financing benefits because the two banks’ spreads are already trading closely.

Scholtz points out that Banco BPM offers complementary strengths in asset management closer to home. Alloatti said absorbing a domestic peer was also one of the only remaining options for the Italian lender to play a leading role on the home stage.

“In Italy, there isn’t much you can buy to bridge the gap with (Italy’s largest bank). understanding. Maybe Banco BPM…which is why they’ve looked at it in the past. “Banco BPM is the only bank that could potentially buy to get somewhat closer to Intesa,” Alloatti said. “Intesa Sanpaolo is currently Italy’s largest bank by total assets.

KBW analyst Hugo Cruz told CNBC in emailed comments that in approaching Banco BPM, UniCredit has the “added value” of informing German shareholders that other M&A options are available. Nonetheless, he stressed that the domestic takeover bid was likely “mainly a response to the acceleration of the integration process in the Italian banking system” triggered by Banco BPM’s acquisition of a stake in Monte dei Paschi.

Orcel may have to decide whether to go big overseas or stay domestic, with analysts pointing to high integration costs and significant costs in management time if UniCredit attempts to absorb both acquisition targets.

Ultimately, KBW’s Cruz said the Italian lender ranked 15th.^Day It has delivered consecutive quarters of growth this fall and the stock is up about 61% so far this year. You can choose it alone.

“I don’t think Mr. Orcel should do a bank acquisition. He has already stated that any acquisition must add value compared to (UniCredit’s) standalone strategy, and without an acquisition the bank will continue with the same strategy. He is already a shareholder. It included a high level of capital allocation for investors and targeted the use of excess capital by the end of 2027, with the Italian lender previously abstaining from bidding because it was “still in the process of restructuring and has not made any acquisitions.” . call.”

“I hope they have the discipline to walk away from both deals if they don’t generate returns for shareholders,” Morningstar’s Scholtz added.