- Relative share price movements may make offer dilutive for Intesa
- Not using Danish compromise raises prospect of capital increase
- Joint bid with foreign partner may face government opposition
Intesa San Paolo [BIT:ISP] could face an uphill struggle to put together a compelling bid for Assicurazioni Generali [BIT:G] as the prospect and rationale of a deal continues to be surrounded by uncertainty, according to sector bankers and an Intesa minority investor.
Intesa CEO Carlo Messina indicated during recent investor meetings that a Generali bid is just one among several plans the bank is considering, the investor said. The shareholder estimated that at this stage a deal has a 50% chance of actually materialising.
According to media reports, Messina has laid out three condition for going ahead with a bid: any pricing will preclude a premium thanks to the synergies created from a merger; the combined entity would still have to deliver strong dividends; and the capital position of the merged entity must be solid.
However, the new group would be exposed to significant dis-synergies, for instance between the companies’ insurance units Intesa Vita and Generali Vita, said one of the bankers. The idea of not paying a premium, while reasonable from Messina’s point of view, would not be feasible, given that Generali shares have increased and Intesa’s dropped since the publication of the first rumours about the deal, the banker said.
An Intesa/Generali tie-up may have made sense when Generali’s share price was at EUR 10 per share in the autumn, but, at its current price level, it would hardly be a good idea for Intesa, a sector analyst concurred. Intesa shares are currently trading at EUR 2.20, while Generali is trading at EUR 14.78. Pre-rumour, Intesa was trading at EUR 2.42, while Generali was at around EUR 13.71.
Additionally, Messina has signalled to investors Intesa would not take advantage of the preferential treatment offered by the so-called Danish compromise rules, which allow lenders to risk-weight insurance assets rather than deduct them from their capital, so the bank might find itself in a potentially challenging position, the shareholder said.
According to Article 49 of the Capital Requirements Regulation (CRR), regulators may permit a bank to not deduct holdings of own funds in an insurance business where it is invested. Then, the insurance holding would qualify as an “exposure” and be risk-weighted in line with the CRR’s Chapter 2 or 3, Title II Part Three. Exposures to EU member states’ central governments carry a 0% risk weight, according to CRR’s Article 114.
Generali reported EUR 163.5bn holdings of predominantly Italian and French originated government bonds according to the latest available data, for FY15.
In absence of the Danish compromise, investors are concerned that Intesa might be forced to launch a capital increase if it moves forward with a bid, the shareholder said.
According to Dealreporter analytics, Intesa’s last reported Tier 1 ratio of 13.9% and Common Equity Tier 1 (CET1) Capital of EUR 45.54bn would imply risk weighted assets (RWA) of EUR 327.6bn. On that basis, Intesa would need to raise EUR 1bn of fresh CET1 capital for every 0.3 percentage points it wants to raise its Tier 1 ratio by, if RWA remains unchanged, according to Dealreporter analytics.
Alternatively, Intesa may have to put forward an offer in cooperation with a third player, the shareholder said.
Allianz [ETR:ALV] could be the most logical fit, if Intesa were to join forces with another company, the shareholder and a second banker agreed.
The German insurer is too small to launch a bid on its own, but could be looking for opportunities to use its extra capital, the shareholder said.
Allianz chief executive Oliver Bate has indicated interest in buying Assicurazioni Generali’s Chinese and French businesses, media reports indicated last month.
Axa [ETR:ALV] has been seen as the company most likely to acquire Generali’s German business, while Allianz has been thought of as a possible acquirer of Generali's French operations, reports said.
But a joint bid with Allianz could face several hurdles, starting with a tough competition review, said the first banker, and a third and fourth sector banker. Foreign bidders could also face opposition from the Italian government, the first banker said.
Furthermore, from a German perspective, Italy likely looks like a rather weak market, and it is unclear why Allianz would want to take on that exposure to Generali’s large amount of Italian government bonds, a fifth sector banker argued.
Further complicating Intesa’s bid is the fact that confusion over a possible offer is casting a potentially damaging light on Intesa shares, which foreign funds in particular have traditionally viewed as a safe bet in the relatively risky Italian banking sector, the shareholder added.
But on a more upbeat note, investors might ultimately be persuaded about the merits of a deal that expands Intesa’s revenue streams beyond the traditional banking model, provided the lender manages to design a convincing plan, the shareholder said.
In principle, a merger with Generali makes sense from a strategic point of view and Intesa’s management has a good reputation among investors, he added. Investors await more detail before making a decision, he noted.
Intesa did not return a request for comment. Allianz and Generali declined to comment.