Italian financial regulators have a long track record of shielding Italian banks from foreign buyers. This protectionist philosophy jars with the spirit of free competition that the European Union is seeking to engender, and many observers agree it's only a matter of time before Italian regulators' resistance falters and the Italian banking market is opened up. Sure enough, there have been two major bids this year. Spanish bank BBVA has bid for Banca Nazionale del Lavoro (BNL). And Dutch bank ABN Amro has launched a bid for Banca Antonveneta.
But the contrasting experience of the two takeover attempts is sending mixed messages to the international investor community. On the one hand, BBVA's deal looks set to succeed without significant interference from either the Bank of Italy or Italian markets regulator Consob. But on the other, ABN Amro has been thwarted in its takeover attempts after intervention by the Bank of Italy.
Soon after the Dutch bank made its €6.3 billion cash offer, an unlikely rival bid emerged from Italian bank Banca Popolare di Lodi (BPL). The bid raised eyebrows because BPL's market capitalisation is less than a third of Antonveneta's – to some onlookers, it seems like a desperate attempt to keep Antonveneta in Italian hands.
To the chagrin of ABN Amro, the Bank of Italy gave BPL immediate permission to build up its stake in Antonveneta. BPL was therefore able to replace Antonveneta's board. The Dutch bank had had to wait several weeks for similar approval.
While ABN Amro welcomed the Bank of Italy's approval of its offer in the first place, all anecdotal evidence suggests that the central bank has been using its influence behind the scenes to frustrate the foreign bid.
Consob conferred a fig leaf of respectability on proceedings by handing down a landmark ruling against BPL, claiming that it had colluded with other investors to block ABN Amro's cash offer. BPL must now make an all-cash offer, rather than the cash-and-share offer it had first put forward. But the overall message remains: protectionism in Italy may be on the wane, but it will not go down without a fight.
"Banca Popolare di Lodi seem to have the upper hand at the moment," says Roberto Henriques, financials analyst at JPMorgan. "Many investors perceive that they are acting as a Trojan horse for protectionist interests."
Corinne Cunningham, financials analyst at Royal Bank of Scotland, adds: "There is still a reasonable chance that the ABN deal will go through. But the odds have moved in Lodi's favour since it was forced to make a cash offer itself. Lodi is however very highly leveraged with thin capital ratios and remains very cheeky with a bid that's lower than ABN's."
ABN Amro could force the issue by increasing its bid. By raising its offer from €25 a share to €27 a share, the Dutch bank would be almost certain to price an already-stretched BPL out of the market. But as Richard Thomas, financials analyst at SG CIB argues, €25 a share is already quite a full price. "Raising the offer to €27 a share would destroy value," he says. ABN Amro has already raised the capital for the deal from its shareholders, meaning that the use of the proceeds must be motivated by shareholder value creation.
While analysts agree that the Italian banking sector remains in need of consolidation, most do not see the Antonveneta and BNL deals as harbingers of a new era of cross-border M&A. "One or two transactions don't make a trend," says Paul Fenner-Leitao, financials analyst at Barclays Capital. "There were maybe three immediately likely targets – Antonveneta, BNL and Capitalia – and now two of them are under offer."
"These deals won't open the floodgates in Italy," says Henriques. "There is still clearly a lot of political influence in the process."
He also argues that because some of the smaller banks are co-operatives, it is much more difficult for other banks to mount takeover bids. Many co-operative banks have 'one man, one vote' voting systems, which make it pointless for outside investors to build up majority stakes.
Cunningham disagrees, claiming that Italy's co-operative banks have been forced to make themselves more available to takeovers. She cites Banca Popolare di Verona e Novara and Banca Popolare di Milano as potential takeover targets.
Still, the episode is yet another example of how far Italy has to go to improve its corporate reputation – and how badly reform of the Italian banking system is needed. But SG CIB's Thomas warns against stereotyping the Italian banking system. He points out that the market does not know the content of the communications between ABN Amro and the Bank of Italy. He also points out that the Italian banking sector is not a completely closed market: many foreign investors hold minority stakes in Italian banks, and Deutsche Bank has been operating in Italy for over a decade.
But ultimately, Italian regulators' track record is fairly clear. The Bank of Italy may have realised that it cannot show an overt preference for BPL with the EU looking over its shoulder, but it seems to have done everything it can to help BPL, and hinder ABN Amro.
The Bank of Italy is not only opposed to foreign ownership, it has a history of opposing even internal consolidation. The victims are the Italian banks themselves. As a result of protectionist policies, the balance sheets of Italian banks are relatively small, meaning that they operate at a size disadvantage compared with their European peers.
JPMorgan's Hendriques notes the irony of Italian banks being targeted by institutions from countries with much smaller economies. Spain, for example, deregulated its banking sector in the 1990s. This led to the mergers that created BBVA and Banco Santander Central Hispano in 2000. "Spanish banks are now able to punch above the relative weight of their economy," says Henriques, "because they have been allowed to consolidate and grow to a European scale, contrary to what has happened in Italy."
What would the deals mean for bondholders?
Aside from the circumstances of the bids, bondholders of the acquiring banks will want to know what a successful merger will mean for the creditworthiness of BBVA and ABN Amro. The acquisitions do make sense within the context of the sector. The Italian banking market is still in desperate need of consolidation. Local players work inefficiently with small balance sheets, and most Italian banks operate in a cartel-like market structure, leaving clients little choice but to pay steep fees for their services. The scene is set for larger and more advanced institutions to enter the market, trim some of the fat and make fees competitive.
A BBVA bondholder should probably be happier than an ABN Amro bondholder. BBVA target BNL is a nationwide franchise, which will provide a stable platform for organic growth. Antonveneta, by contrast, is concentrated in the northeast of Italy, although it is technically a nationwide franchise. As such, ABN Amro would need to make further acquisitions, such as Capitalia, in order to get scale in Italy. Simon Adamson, financials analyst at CreditSights, claims that the €6.3 billion ABN Amro offer is expensive, and is unconvinced by the financial rationale of the deal. "We believe this acquisition would slightly dilute ABN Amro's credit standing," he says.
Neither transaction will set the world on fire. But they're not bad deals either, says Fenner-Leitao at Barclays Capital. "That's not the premise of these cross-border acquisitions – it's more about market extension and diversification than extracting lots of value through cost synergy," he says.
"I would be happy if I were a BBVA investor," says SG CIB's Thomas. "BBVA has a good track record for external growth. Acquiring BNL would be a good diversification move, allowing BBVA to rebalance its exposure back towards western Europe, after some shaky experiences in Latin America."
ABN Amro, on the other hand, is already well diversified, and so it is not as clear what strategic objective is guiding its pursuit of Antonveneta.
BPL's bid for Antonveneta is a different proposition altogether. Analysts have serious reservations about how building up its stake in Antonveneta has affected BPL. "The Banca Popolari de Lodi offer is an extreme situation, given that it is attempting to acquire a bank with three times its market capitalisation," says Henriques at JPMorgan. "In my opinion it's the closest thing to an LBO that you get in the banking world, and it is clearly not to be encouraged.