Finance

UniCredit’s Orcel could still sweeten his bid and take on a double M&A offensive

Published

2 months ago

December 6, 2024

Business Finance News

Andrea Orcel, chief executive officer of Unicredit, in London, UK, on Thursday, Nov. 23, 2023.

Bloomberg | Bloomberg | Getty Images

Divided between two takeover courtships, UniCredit‘s Andrea Orcel still has room to sweeten his bid for Italy’s Banco BPM, analysts say, while political turmoil stalls a deal with Germany’s Commerzbank.

Once a key architect in the controversial 2007 takeover and later break-up of Dutch bank ABN Amro, Orcel revisited his ambitions for cross-border consolidation with the September announcement of a surprise stake build in Commerzbank. 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 turbulence in Chancellor Olaf Scholz’s ruling coalition — UniCredit also last month turned its eye to Banco BPM, with a 10 billion-euro ($10.5 billion) offer that the Italian peer said was delivered on “unusual terms” and does not reflect its profitability and growth potential.

Along the way, Orcel drew frowns from the Italian administration, with Economy Minister Giancarlo Giorgetti warning that “the safest way to lose a war is engaging on two fronts,” according to Italian newswire Ansa.

Analysts say that the spurned UniCredit — whose CET1 ratio, reflecting the bank’s financial strength and resilience, stood above 16% in the first three quarters of this year — can still improve its domestic bid.

“There is scope for increasing the [Banco BPM] offer,” Johann Scholtz, senior equity analyst and Morningstar, told CNBC.

However, he warned of “limited” room to do so. “Think more than 10% [increase], you are probably going to dilute shareholder earnings.”

UniCredit’s starting proposal was for an all-stock deal that would merge two of Italy’s largest lenders, but offered just 6.657 euros for each share.

Both Scholtz and Filippo Alloatti, senior credit analyst at Federated Hermes, said that UniCredit could sweeten the proposition by tacking on a cash component.

“Remember, that’s the second attempt from Orcel to buy [Banco] BPM … I don’t think there’ll be a third attempt. I think that either they close [the deal] now, or probably he walks. So I believe a cash component could be on the table,” Alloatti told CNBC. Orcel last month labeled Banco BPM as a “historical target” — stoking the flames of media reports that UniCredit had previously sought a domestic union back in 2022.

The Italian stage was primed for M&A activity early last month, after Banco BPM acquired a 5% holding in Monte dei Paschi — the world’s oldest lender and another former takeover target of UniCredit, until talks collapsed in 2021 — when Rome sought to reduce its stake in the bailed-out bank.

Critically, Scholtz noted, UniCredit’s offer “puts [Banco] BPM into a difficult position,” triggering a passivity rule that impedes it from any action that might hinder the bid without shareholder approval — and could stifle Banco BPM’s own early-November ambitions to acquire control of fund manager Anima Holding, which also owns a 4% stake in Monte dei Paschi.

Offense-defense

A consolidation offensive could be UniCredit’s best defense in an environment of easing interest rates.

“Multi-year long restructuring, balance sheet de-risking and materially improved loss absorption capacity” propelled UniCredit to a BBB+ long-term debt rating from Fitch Ratings in October, above that of Italy’s own sovereign bonds.

But the lender must now contend with an environment of loosening monetary policy, where it is “more exposed to changes in interest rates due to its relatively limited presence in asset management and bancassurance,” Alessandro Boratti, analyst at Scope Ratings, wrote last month.

Both takeover prospects hedge some of that exposure. A Commerzbank union in Germany, where UniCredit operates through its HypoVereinsbank division, could create synergies in capital markets, advisors, payments and trade finance activity, JPMorgan analysts signaled in a November note. They added that such a union would produce a “limited” advantage in funding, as the two banks’ spreads already trade closely.

Closer to home, Scholtz notes, Banco BPM offers complementary strength in asset management. Alloatti said that absorbing a domestic peer is also one of the Italian lender’s only remaining options to take a leading role on the home stage.

“There really isn’t much they can buy in Italy to bridge the gap with [Italy’s largest bank] Intesa. Probably Banco BPM … that’s why they looked at it in the past,” Alloatti said. “Banco BPM is the only bank they could potentially buy to get somewhat closer to Intesa.” Intesa Sanpaolo is currently Italy’s largest bank by total assets.

Approaching Banco BPM, KBW Analyst Hugo Cruz told CNBC in emailed comments, also has the “added value” of signaling to German shareholders that UniCredit has other M&A options available to it. He nevertheless stressed that the domestic acquisition bid is likely “mainly a reaction to the acceleration of the consolidation process in the Italian banking system,” triggered by Banco BPM’s acquisition of its Monte dei Paschi interest.

Orcel may need to decide between going big abroad or staying home, with analysts pointing to high integration costs and an extensive toll on management time if UniCredit attempts to absorb both of its takeover targets.

Ultimately, KBW’s Cruz said, the Italian lender — which notched its 15^th consecutive quarter of growth this fall and has seen a roughly 61% hike in its share price in the year to date — can choose to stand alone.

“I don’t think Mr. Orcel has to do a bank acquisition. He already stated that any acquisition will need to add value compared to [UniCredit]’s standalone strategy, and if no acquisition the bank will continue with the same strategy which already included a high level of capital distribution for shareholders and which targeted the usage of excess capital by end of 2027,” he said, noting that the Italian lender abstained from bids previously “because it was still under restructuring and did not have the acquisition currency.”

“We would hope that they would have the discipline to walk away from both deals” if they do not generate return to shareholders, Morningstar’s Scholtz added.

Finance

Chinese investment in the U.S. isn’t likely to pick up under Trump

Published

7 hours ago

January 20, 2025

Business Finance News

Cho Tak Wong, the chairman of auto glass giant Fuyao Glass, bought the vacant General Motors manufacturing plant in Moraine, Ohio in 2014.

The Washington Post | The Washington Post | Getty Images

Chinese investments in the U.S. have dramatically declined since Donald Trump’s first term. This trend is unlikely to reverse as Trump returns to the White House, analysts said.

Trump has threatened additional tariffs on Chinese goods soon after his inauguration on Monday, building on an increasingly tough U.S. stance on Beijing.

“That’s probably the last thing on Trump’s mind, is trying to incentivize [Chinese companies] to invest here,” said Rafiq Dossani, an economist at U.S.-based think tank RAND.

“There’s an ideological mismatch. All the rhetoric is, keep China out of the U.S., let their products come in, which are low-end,” he said in an interview earlier this month. But other than that, “don’t, don’t let them come in.”

In the last several weeks, Emirati property giant Damac has pledged $20 billion to build data centers in the U.S., while SoftBank CEO Masayoshi Son announced a $100 billion investment for artificial intelligence development in the U.S. over Trump’s four-year term.

Trump's stance on China remains unclear, says US ambassador

Chinese investment deals in the U.S. have slowed drastically, according to the latest American Enterprise Institute data. Just $860 million flowed into the U.S. in the first six months of 2024, following $1.66 billion in 2023. That’s down sharply from $46.86 billion in 2017, when Trump began his first term.

At the peak, Chinese companies had made high-profile U.S. acquisitions, such as buying the Waldorf Astoria hotel in New York. But regulators on both sides have stemmed the flow.

“Chinese investment in the U.S. has slowed down dramatically since Beijing tightened control over capital outflows in 2017, followed by a series of regulatory policies in the U.S. aimed at excluding investments in certain sectors,” Danielle Goh, senior research analyst at Rhodium Group, said in an email.

In the “foreseeable future,” she doesn’t expect Chinese investments in the U.S. will recover the peak levels seen during the 2016 to 2017 period. Goh pointed out that instead of acquisitions, Chinese companies have turned more to small joint ventures with U.S. companies or greenfield investments, in which business are built from scratch.

For example, Chinese battery manufacturing company EVE Energy is the technology partner with a 10% stake in a joint venture with U.S. engine company Cummins’ Accelera division, Daimler Truck and PACCAR. The companies announced in June 2024 they were kicking off plans for a battery factory in Mississippi that would begin production in 2027 and create more than 2,000 jobs.

Since the Covid-19 pandemic, the U.S.-China Chamber of Commerce has mostly helped Chinese e-commerce companies set up local offices, rather than establish manufacturing businesses, the nonprofit’s president Siva Yam told CNBC.

“Most of those investment nowadays tend to be a little bit smaller, so they are not on the radar, easier to approve,” he said, referring to regulators in both the U.S. and China. But he remained uncertain about whether Chinese companies could use investments to offset the impact of tariffs.

Individual U.S. states have grown increasingly wary of Chinese investment. Last spring, Politico reported that more than 20 states were passing new restrictions on land purchases by Chinese citizens and companies, or updating existing rules.

Chinese hackers in December targeted a government office that reviews foreign investment in the United States, CNN reported, citing U.S. officials. This was part of a wider breach of the Treasury Department, which declined a CNBC request for comment.

Deal-making strategy?

Trump has indicated tariffs may be used to coerce Chinese investment in the U.S.

In his speech accepting the Republican nomination, he said, “I will bring auto jobs back to our country, through the proper use of taxes, tariffs, and incentives, and will not allow massive auto manufacturing plants to be built in Mexico, China, or other countries.”

“The way they will sell their product in America is to BUILD it in America, and ONLY in America. This will create massive jobs and wealth for our country,” he said, according to an NBC News transcript.

Chinese battery giant CATL reportedly said in November it would build a U.S. plant if Trump allowed it. The company did not immediately respond to a request for comment.

Advocacy group Center for American Progress pointed out in December that during his first term, Trump cancelled restrictions on Chinese telecommunications company ZTE — just days after the Chinese government and Chinese banks invested $1 billion in a Trump Organization-affiliated theme park in Indonesia.

The Trump transition team did not immediately respond to a request for comment on the ZTE deal or the opportunities for Chinese companies to invest in the U.S.

Even if Trump welcomed more Chinese investment, or coerced it through tariffs, large investments are long-term processes that won’t happen overnight, pointed out Derek Scissors, senior fellow at the American Enterprise Institute.