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Italy, UniCredit in a deadlock over MPS as deadline approaches

Italy, UniCredit in a deadlock over MPS as deadline approaches

  • Summary:
  • Sources close to the deal say the MPS cap hike is the biggest obstacle to a deal given the size of the increase.
  • Negotiators say UniCredit capital demands are difficult to meet -sources.
  • Orcel studied Banco BPM takeover before MPS talks - sources cite: "Orcel looked into BanCo B PM take over before the MPPS talks"
  • Italy must cut 64 percent of MPS stake at least by mid-2022.

Monte dei Paschi (MPS), which is embroiled in bankruptcy, is a struggling bank, according to people involved in the talks, with the government stifling demands exceeding 7 billion euros ($8 billion). UniCredit boss Andrea Orcel and Italy's government are poles apart over the terms of pending ties over acquiring MPS, who are reportedly facing financial difficulties.

Since many issues remain unresolved, the pressure to get to a conclusion is mounting.

It has long been believed that a merger with santer rival is the only way to draw thaw in the midst of oblivion that has made MPS the epitome of the country's banking woes.

UniCredit, on the other hand, has few options at home if it wants to overcome a gap with rival heavyweight Intesa Sanpaolo (ISP.MI), whose market share last year exceeded UniCoredits' after the acquisition of mid-sized rival UBI.

UniCredit (CRDI.MI) hopes to have a decision in hand by the time its board meets to approve quarterly results on Oct. 27, but sources on both sides claim that may now not be possible, with varying reports suggesting that the three months' old negotiations could end abruptly.

UniCredit had stipulated in its exclusive negotiations on July 29 to buy "selected parts" of MPS (BMPS.MI) while stating the deal must leave its capital intact and increase earnings per share by 10%.

Italy's only bank of global systemic relevance said it targeted MPS' branches in wealthier northern and central regions and would leave behind any soured or risky loans as well as legal risks due to mismanagement.

After completing its due diligence study in September and allowing matters to rest until after local elections earlier this month, UniCredit has only just presented to the Treasury detailed demands and the ministry is still going through the documents, according to two of the sources.

The biggest stumbling block is the amount of cash it will need to inject into MPS to return it to private hands just four years after spending 5.4 billion euros to rescue it.

MPS has stated intentions to raise 2.5 billion euros in cash next year if it fails to find a buyer, but UniCredit believes even obtaining 2.2 billion dollars in funding twice that amount would be merely 'a stopgap solution', according to Reuters.

According to one source, Rome is opposed to fair value adjustments UniCredit is requesting after applying its internal risk models to MPS' balance sheet. UniCredit declined to comment.

The source said the Treasury, which has already secured tax breaks of around 2 billion euros to ease the UniCredit-MPS deal, is reluctant to spend more than 3.5 billion dollars to beef up MPS' capital reserves and fund staff exits.

HIGH STAKES ARE THE HIGHEST STRENGTHS.

To bring MPS' efficiency levels down to its own, UniCredit needs to send 7,000 workers into early retirement, more than twice what MPP had planned to reduce under a draft business plan through 2025.

If negotiations to fail, the stakes for both sides are high.

MPS, a lender that the European Banking Authority in releasing re-privatizing information this summer ranked as the euro zone's most vulnerable in its stress test, is expected to be regained by the government of Prime Minister Mario Draghi by mid-2022 at the latest.

UniCredit's revenues and profits are under enormous strain after his predecessor focused on bringing down the balance sheet and bolstering its capital reserves. Orcel, the former investment banking chief at UBS (UBSG.S), is the most difficult person to boost Unicredits' revenues or profits after focusing on cleaning up the company'' s financial situation.

He has opened the door to potential mergers and acquisitions to boost growth, but there are few domestic targets while cross-border transactions remain a challenge.

Orcel has considered a move on Banco BPM (BAMI.MI), another mid-tier bank, according to two people familiar with the matter.

He has put the dossier on hold to concentrate on MPS, which he has described as the best deal on the table for UniCredit.

In the interim, Banco BPM shares have rallied 64%, compared to a 37% increase in Italy's banking index (.FTITLMS3010) since the beginning of the year.

UniCredit's own shares, according to analysts, have been boosted in part by hopes of a market-friendly agreement with the Treasury, which in 2017 gave Intesa 3.5 billion euros in cash to persuade it to buy for 1 euro the good assets of two local banks that were liquidated.

($1 = 0.8590 euros)

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