Italy strives to meet UniCredit conditions for MPS deal, sources say

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ROME (Reuters) – Italy’s Treasury is working to meet conditions UniCredit set for a possible takeover of Monte dei Paschi in the latest attempt to offload the ailing state bank to a healthier peer, said three sources familiar with the matter.

FILE PHOTO: The entrance to Italian bank Monte Dei Paschi di Siena is seen in San Gusme near Siena, Italy September 29, 2016. REUTERS / Stefano Rellandini / File Photo

Despite the lack of significant progress in the protracted negotiations, the Treasury still sees UniCredit as the best option for Monte dei Paschi (MPS), the sources told Reuters on condition of anonymity as the talks are private.

The three sources said the two sides have continued to negotiate, warning that any deal will take time. One of the sources said the positions were distant and it was too early to predict the outcome of the talks. UniCredit declined to comment.

The Treasury is currently avoiding alternative solutions, such as dismantling MPS, although sources have said it may consider asset splits to facilitate a single-buyer sale.

The main condition posed by the Milanese bank in the talks which began almost a year ago under former managing director Jean Pierre Mustier is that any deal leaves intact the capital reserves that UniCredit has worked hard to strengthen.

New CEO Andrea Orcel, the former head of investment banking at UBS, has shown little interest in a deal in conversations with Treasury officials, focusing instead on overhauling UniCredit’s structure.

Unveiling the latest organizational changes last week, Orcel said he was currently focusing on “internally,” after previously indicating he might consider mergers and acquisitions to speed up his earnings boost strategy.

After saving MPS in 2017 by spending 5.4 billion euros ($ 6.4 billion), the Italian Treasury has pledged to reduce its stake by 64% by mid-2022 at the latest.

A major obstacle to a sale has always been some 10 billion euros in legal risks to MPS after years of mismanagement.

The Treasury and its advisers have devised a complex plan to protect the buyer from legal claims, but UniCredit is expected to approve the plan, sources said.

To pave the way for a deal, the Treasury has also significantly reduced MPS’s sour lending burden, and sources have said it is ready to do more on the bad debt front.

To ensure that the deal does not burn capital, in addition to receiving liquidity to cover restructuring costs and replenish its reserves, UniCredit must also be able to exit without penalty from the business partnerships that MPS has set up. on insurance and other financial products, a person familiar with the matter said.

So far, Rome has set aside 1.5 billion euros to recapitalize MPS as part of a merger.

MPS, which is expected to hurt Europe-wide industry stress tests this month, told the European Central Bank it would raise € 2.5 billion by April 2022.

The amount of state liquidity required for a deal to be reached has always been one of the sticking points in discussions with MPS’s assessment, people familiar with the process said.

To soften a deal, the Treasury has put in place tax incentives for mergers approved in 2021 that involve a € 2.2 billion capital increase in a UniCredit-MPS deal. Political opposition in May thwarted an attempt to further strengthen incentives.

($ 1 = 0.8500 euros)

Report by Giuseppe Fonte in Rome and Valentina Za in Milan; Editing by Edmund Blair


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