Monte Paschi ‘Unthinkable’ Move on Larger Rival Stuns Italy #ItalyFinance

(Bloomberg) — The last time Banca Monte dei Paschi di Siena SpA bought another lender, it ended in tears.

That’s why much of Italy was shocked to wake up to an announcement on Friday that the world’s oldest bank — which is still subject to a government bailout — wants to buy bigger rival Mediobanca SpA in an all-share deal valued at €13.4 billion ($14.1 billion).

“A few months ago this would have been an unthinkable move,” said Stefano Girola, CIO of the Brescia, Italy-based family office FI-MEP. The bank that “no one wanted has put itself center stage.”

The development reflects the rapid turnaround of Monte Paschi in recent years under Chief Executive Officer Luigi Lovaglio, which has enabled the government to reduce its stake. It is also an expression of Italy’s interest in creating a new national banking champion.

Rome has full faith in Paschi’s management, which “has achieved exceptional results, has a plan and has made a market proposal, if the market responds, we’ll be happy,” Finance Minister Giancarlo Giorgetti said at an event Friday. The offer is “totally transparent and in the interest of the Italian economy.”

There has already been a flurry of dealmaking in Italy’s banking sector in recent months. UniCredit SpA, one of the two largest lenders, is vying to acquire Banco BPM SpA, the current No. 3. But Paschi’s plan to take over Mediobanca would create “a strong third player,” Scope Group bank analyst Alessandro Boratti said.

That would serve as a counterweight to larger lenders. And as the Italian government is still Monte Paschi’s biggest shareholder, it would help Prime Minister Giorgia Meloni keep much of the country’s financial services sector under domestic control.

It would also strengthen Rome’s influence over Generali, an insurer and major holder of Italy’s sovereign bonds, which counts Mediobanca as its largest shareholder. Greater control there would give the government more sway over “the entire banking and insurance value chain,” said Carlo Alberto Carnevale Maffe, who teaches business strategy at Milan’s Bocconi University.

Generali recently signed a preliminary agreement to merge its asset management operations with the French banking group BPCE. Officials in Rome have been looking at ways to maintain Italian influence in the deal, while shareholder Francesco Gaetano Caltagirone, who previously sought to oust Generali CEO Philippe Donnet, opposes the transaction, Bloomberg News has reported.

The Mediobanca takeover is far from a done deal — Paschi says its offer was at a 5% premium to Mediobanca’s share price before the deal was announced, a cushion that disappeared as the stock dropped 6.9% to €6.49 in Milan on Friday. Over that same period, Mediobanca rose 7.7% to €16.47.

Investor skepticism could also be a hurdle. KBW analyst Hugo Cruz said in a reaction note that the deal at first sight looks like it “has limited chances of success.”

Meloni can, however, count on support from two powerful billionaire clans: the Del Vecchios, who control Ray-Ban maker EssilorLuxottica SA, and the family of construction tycoon Caltagirone. The families bought substantial stakes in Monte Paschi from the government in November and have since expanded their holdings.

Neither Italy nor the billionaires own majorities in either lender, meaning they’ll face the challenge of persuading other shareholders to sign on to their plan. But if they manage to do so, it would make them influential investors in what would be one of Italy’s largest banks.

The blessing of the government and of two billionaire dynasties has effectively transformed Monte Paschi into “a buyer that can affect the whole Italian financial system,” according to Girola.

Mediobanca sees the move as hostile and will likely end up rejecting it, according to a person familiar with the matter.

The proposed takeover represents a stunning turnaround for the Siena-based lender. Founded in 1472 to fund agricultural and commercial activity, it went on to expand throughout the peninsula, becoming one of Italy’s largest banks in the process.

The story of Monte Paschi’s downfall began in 2007 when it acquired Banca Antonveneta SpA from Spain’s Banco Santander SA for €9 billion — a third more than what Santander had paid to buy the lender just weeks earlier. As the global financial crisis rocked Europe’s economy, the deal saddled Paschi with losses that would eventually force it into years of restructuring and litigation.

The bank was first bailed out by the Italian government in 2009 and nationalized eight years later.

Since Lovaglio took over in 2022, Monte Paschi has seen a massive increase in profitability. Between his cost-cutting and higher interest rates, the bank was able to resume dividend payments. That gave Italy an opportunity to start privatizing the lender.

Still, few would have anticipated that Monte Paschi would turn from potential takeover target to possible buyer so soon.

In its statement on Friday, Paschi said the acquisition would enable it to add wealth management operations and cut €300 million in annual costs. The enlarged bank would also be able to “accelerate the usage of €2.9 billion” in deferred tax assets to reap capital benefits.

Some were as surprised by Monte Paschi’s proposed target as they were by the move itself. This is an “unexpected combination,” said Morgan Stanley analysts Pamela Zuluaga and Alvaro Serrano, noting that while Mediobanca specializes in asset and wealth management, consumer finance and investment banking services, Monte Paschi relies on traditional retail and commercial banking services.

It’s essentially a political move, said Carnevale, the business professor, which could cause markets and institutional investors to react.

Others said different motives may be at work.

“I believe Paschi made a bid for Mediobanca as a defensive move to reduce its own speculative appeal,” said Margherita Strazzari, an asset manager at Sempione SIM.

–With assistance from Alberto Brambilla and John Deane.

(Updates with finance minister in fifth paragraph.)

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