MILAN Efforts by Italian insurer Unipol (UNPI.MI) to take over loss-making peer Fondiaria-SAI FOSA.MI suffered a big setback on Friday when Fondiaria's main owners rejected a crucial clause for a rescue deal that would create a large domestic player.
The survival of Fondiaria, Italy's biggest car insurer and the second largest national insurer after Assicurazioni Generali (GASI.MI), is crucial to leading Italian investment house Mediobanca (MDBI.MI), which holds 1.1 billion euros ($1.38 billion) of Fondiaria debt.
The Mediobanca-led plan is opposed by investment funds Sator, controlled by banker Matteo Arpe, and Palladio Finanziaria, which on Friday tried to woo Fondiaria's owners, the Ligresti family, through a rejigged rival takeover offer.
Two members of the Ligresti family, which controls Fondiaria through its parent Premafin PRAI.MI, said in a statement on Friday they would not accept a clause in the merger plan waiving protection from legal action to former managers at Fondiaria.
Unipol, Italy's No.3 listed insurer, had previously offered the Ligresti family an amnesty against potential future legal action but was forced to remove it by market regulator Consob.
The two Ligrestis also cited continual changes of the Unipol offer as well as doubts over the Bologna group's financial strength, adding it was in investors' interest to consider alternative solutions.
"Seems to me the Unipol deal has gone down the tubes with this statement. Suspicious timing too coming right after the Sator reoffer," a Milan insurance analyst said asking not to be named.
In a statement on Friday, Unipol said it was sticking by conditions it had set for the merger to go ahead. Fondiaria CEO Emanuele Erbetta told reporters the group would keep looking at Unipol's proposal - signaling a growing rift between management and the Ligrestis.
In January, Mediobanca, which is also the largest shareholder of Generali, brokered a deal in which Unipol agreed to rescue Fondiaria through a complex four-way merger and a series of capital increases aimed at bolstering depleted capital bases.
But the plan came under regulatory scrutiny after hitting several snags and has been changed several times to meet watchdog requests.
If a buyer is not found, Fondiaria risks being put under court-appointed administration.
Premafin's creditor banks have also threatened to call in the guarantee on the holding's debt if the deal with Unipol falls through.
The outcome of the takeover battle could also determine whether Mediobanca, who has been instrumental in building Italian capitalism in the past 60 years, would maintain intact its influence over the country's financial landscape.
Unlike the Unipol bid, the offer from the two Italian funds does not envisage any merger with debt-ridden Premafin which, without fresh cash, is in danger of going bankrupt.
Failure to reach an agreement with Unipol would increase the likelihood that Fondiaria, with a sub-standard solvency ratio, could be placed under court-appointed administration.
Such an event could mean Mediobanca's subordinated loan was at risk and threatened with a write down, analysts have said.
But a senior source familiar with the situation said Mediobanca's loans to Fondiaria would remain performing, even under this extreme scenario, and that this would increase the likelihood of a merger with Unipol, the only industrial partner willing to take Fondiaria on.
"I don't think administration is likely since there's the Sator bid. If the Sator offer wins out Mediobanca will get back their debt though it would probably be rescheduled," Fidentiis banking analyst Fabrizio Bernardi said.
The two Ligrestis each own 10 percent of Premafin which in turn holds 35.7 percent of Fondiaria.
In a statement later on Friday Fondiaria-SAI said it was assessing the consequences of the Ligrestis' statement, adding its board would examine the offer of Sator and Palladio at a board meeting on June 11. Premafin needs to find money to restructure their debt by June 12 to avoid going bankrupt.
"Sator has pulled off its mask. It wants to strike a deal with the Ligrestis to keep them at the helm of Premafin. This reeks of old-style Italian capitalism," the senior source said.
Fondiaria, which has a market capitalization of just 416 million euros compared with 5 billion euros five years ago, has been run into the ground by years of Ligresti management.
Ligresti patriarch, Salvatore, is currently under investigation for alleged market manipulation.
At 9:33 a.m. EDT (1333 GMT) Fondiaria shares were up 15.7 percent after a brief suspension for excessive gains. Unipol shares were up 4.3 percent and Mediobanca was down 3.5 percent.
(Reporting By Stephen Jewkes; Additional reporting by Jennifer Clark; Editing by Erica Billingham and Jon Loades-Carter)