September 21, 2017 / 12:31 PM / 3 months ago

Breakingviews - UniCredit has narrow lead in Commerzbank M&A fight

LONDON (Reuters Breakingviews) - Talk of cross-border banking M&A is back. UniCredit is interested in merging with Commerzbank, Reuters reported. BNP Paribas is also said to be a potential partner for the German lender. But international banking deals are complicated, political, and have modest economic benefits.  The Italian lender could make a case for tying-up with its 14 billion euro Teutonic peer, but closing a deal may be tricky.

Commerzbank is a perennial takeover candidate, but there are good reasons why other banks may find it attractive now. Its shares are cheap, trading at half their book value, but could be worth more once interest rates rise and the bank completes a restructuring. The German government, which has a 15 percent stake after a bailout in 2009, may be ready to sell.

UniCredit’s interest seems embryonic, but it might be able to justify a deal. Commerzbank has around 8 percent of the German market whilst UniCredit’s subsidiary, HypoVereinsbank, has 2.6 percent. Merging them would rival Deutsche Bank’s combination with Postbank as the largest lender by market share. Morgan Stanley reckons there is a 20 to 30 percent branch overlap between the two banks. Even a conservative savings estimate of say 10 percent of operating costs would create synergies of 1 billion euros, worth perhaps 7 billion euros in present value terms.

UniCommerzbank is far from a done deal. Chief Executive Jean Pierre Mustier has not yet completed the first year of a wrenching turnaround plan that should last until 2019. Even if he was ready, politics may get in the way. German weekly WirtshcaftsWoche reckons the government would prefer a deal with BNP Paribas. That would create a Franco-German powerhouse, and, given its smaller German presence, mean fewer job cuts. For those very reasons BNP might not play along: cost savings are likely to be modest, and it might have to hold more capital if regulators deemed it more systemic.

There may be easier candidates closer to home. Deutsche Bank could probably eke out greater cost savings than either BNP or UniCredit, and the government might prefer a national champion. It too is in the middle of an arduous restructuring, suggesting the battle may be some way off.  Investors hoping for a cross-border merger frenzy anytime soon are likely to be disappointed.

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