By Giovanni Legorano and Patricia Kowsmann
ROME -- Italian bank Intesa Sanpaolo SpA has launched a EUR4.9 billion ($5.3 billion) takeover bid for a smaller rival, a move that would see the creation of the country's largest bank and could usher in a phase of long-waited consolidation in Europe.
The offer for UBI Banca SpA took the market by surprise, mostly because many European banks have resisted entering into merger talks, citing high costs and risks associated with a combination and little investor appetite in funding the ventures.
The deal, if it goes through, would create the eurozone's seventh-largest lender. Intesa, which is now Italy's second-largest bank by assets after UniCredit SpA, would have a customer base of 15 million and EUR1.1 trillion in customer financial assets.
Shares of UBI rose more than 20% on Tuesday, while Intesa shares were up more than 2.0%.
European lenders have been struggling in a low-interest-rate environment that has made it difficult to make money out of receiving deposits and providing loans. That, in addition to an overcrowded sector, has forced Europe's main banking regulator -- an arm of the European Central Bank -- to step in and signal it is willing to help banks merge by easing some conditions.
"This move is completely in line with the expectation of the supervisor, " said Intesa's Chief Executive Carlo Messina.
Italy has more than 500 banks, followed by 400 in France and 200 in Spain. Germany alone has more than 1,500.
The last large European merger attempt was between Germany's Deutsche Bank AG and Commerzbank AG, which fell apart early last year. UniCredit expressed potential interest in Commerzbank, but it has since ruled out targeting big acquisitions, pledging to use its capital for share buybacks and dividend increases instead.
But smaller banks, whose scale makes them more vulnerable to tough business conditions, are starting to sense that either they become buyers or they risk being bought.
"The prospect of the financial and banking sector in the coming years is characterized by a consolidation in which the main operators will be champions both in Europe and outside Europe," Intesa said in a statement, adding it wants to "reach a dimension that will allow it to compete independently."
Under the proposed offer, UBI shareholders will get 17 newly issued shares of Intesa for every 10 UBI shares held, Intesa said.
Although it wasn't previously agreed with UBI, Mr. Messina said the offer shouldn't be considered hostile. A spokesman for UBI declined to comment.
The share offer values UBI stock at EUR4.254 each. UBI shares closed at EUR4.31 on Tuesday, while Intesa shares closed at EUR2.60.
The combined entity could generate consolidated profits higher than EUR6 billion starting in 2022, Intesa said. It won't tap shareholders to raise funding for the acquisition because it plans to use an accounting treatment known as negative goodwill, or so-called badwill.
Badwill lets buyers book a profit if they buy a target for less than net asset value, or book value, which is the difference between a firm's assets and liabilities. If a target company is sold for less than its stated book value, then the buyer can treat the difference as a gain.
Intesa said it would count on badwill of EUR2 billion to cover integration costs and to write down more souring loans in the combined bank's books.
As part of the deal, BPER Banca SpA, a medium-size retail lender, will buy up to 500 branches of the combined network and part of the related assets and liabilities. To finance this, BPER will raise EUR1 billion of fresh capital.
Insurer UnipolSai Assicurazioni SpA will buy the insurance assets related to the branch network sold to BPER.
Mediobanca SpA is acting as adviser to Intesa and as global coordinator and bookrunner for the BPER share sale.
Write to Giovanni Legorano at firstname.lastname@example.org and Patricia Kowsmann at email@example.com