■ Posing conditions for a potential deal: Intesa’s (ISP) CEO posed the conditions for a potential deal with Generali (GASI): no capital weakening and no dilution for shareholders. The CEO also claimed a strategic rationale for the deal mentioning that “insurers make sense when they are integrated in a banking network.”
■ Price and synergies matter: Since the piece of news came out on January 23, GASI jumped by +8.7% (to €14.9 as at Jan 30, or 9.7x PE17E), while ISP dropped by -11% (to €2.20 as at Jan 30, or 10.5x PE17E) setting 6.78 ISP shares for each GASI share market swap ratio. A paper deal could be CET1 accretive but dilutive EPS wise: price and synergies matter for value creation.
■ Potential CET1 and RoTE uplift, but synergies required for EPS accretion look challenging: In our base case, a 100% acquisition could be slightly accretive CET1-wise, if financed via shares swap, and the Danish Compromise is applicable. The higher Generali’s RoTE could support the combined profitability uplift. At the market swap ratio, we need at least demanding €900m post-tax synergies to make the deal EPS accretive.
■ A strategic U-turn: ISP’s strategy was focused on core asset management business while no large scale acquisitions of insurers so far. In our view, the strategic rationale of the Generali deal could lie in: (i) business and geographical diversification; (ii) creation of a huge player in the asset management business; (iii) dilution of the banking business and of bad loans weight. We see the following potential downside: (i) high execution risk; (ii) Regulatory headwinds in terms of potential capital add-ons for complexity; (iii) uncertainty related to the Danish Compromise duration; (iv) potential antitrust issues in Italy; (v) price and synergies inconsistent with value creation.