UniCredit's Orcel could still improve his offer and launch a dual M&A strategy.

• Analysts suggest that UniCredit could improve its rejected all-stock offer to acquire Italian domestic rival Banco BPM by adding a cash component.
• According to Alessandro Boratti of Scope Ratings, UniCredit is more vulnerable to fluctuations in interest rates due to its limited involvement in asset management and bancassurance. To mitigate this exposure, potential takeover targets Commerzbank and Banco BPM could implement hedging strategies.
• UniCredit may face high integration costs and an extensive toll on management time if it decides to absorb both of the banks it is courting abroad.

While political turmoil stalls a deal with Germany's Commerzbank, UniCredit's Andrea Orcel still has room to sweeten his bid for Italy's Banco BPM, analysts say.

Orcel, a former key architect in the 2007 ABN Amro takeover and break-up, recently announced a surprise stake build in Commerzbank, which had been speculated as a potential merger partner for Deutsche Bank.

UniCredit, facing opposition from the German government and turmoil in Chancellor Scholz's coalition, recently made a 10 billion-euro ($10.5 billion) offer to Banco BPM, which the Italian peer described as being delivered on "unusual terms" and not reflecting its profitability and growth potential.

The Italian administration gave frowns to Orcel, with Economy Minister Giancarlo Giorgetti stating that "the safest way to lose a war is engaging on two fronts," according to Italian newswire Ansa.

Despite its strong financial position, with a CET1 ratio above 16% in the first three quarters, UniCredit can still enhance its domestic bid, according to analysts.

Johann Scholtz, senior equity analyst and Morningstar, stated on CNBC that there is potential to expand the [Banco BPM] offer.

He cautioned that there is "limited" space to achieve a more than 10% increase in earnings, which could harm shareholders.

UniCredit initially proposed an all-stock merger of two major Italian banks, but only offered 6.657 euros per share.

Both Scholtz and Filippo Alloatti, senior credit analyst at Federated Hermes, suggested that UniCredit could enhance the offer by adding a cash component.

UniCredit's CEO, Orcel, has stated that Banco BPM is a "historical target" and that he believes a cash component could be on the table. He also mentioned that there may not be a third attempt to buy Banco BPM, as either the deal is closed now or he walks away. This statement was made by Orcel to CNBC.

In early last month, the Italian stage was set for M&A activity, as Banco BPM acquired a 5% stake in Monte dei Paschi, the world's oldest lender and a former takeover target of UniCredit, until talks fell through in 2021, when Rome sought to reduce its stake in the bailed-out bank.

Scholtz pointed out that UniCredit's offer puts Banco BPM in a difficult position, triggering a passivity rule that prevents it from taking any action that may hinder the bid without shareholder approval, which could stifle Banco BPM's early-November ambitions to acquire control of Anima Holding, which also owns a 4% stake in Monte dei Paschi.

Offense-defense

In a low-interest-rate environment, a consolidation offensive could be UniCredit's strongest defense strategy.

Fitch Ratings upgraded UniCredit's long-term debt rating to BBB+ in October, surpassing Italy's sovereign bonds, due to multi-year restructuring, balance sheet de-risking, and materially improved loss absorption capacity.

The lender is now more exposed to changes in interest rates due to its limited presence in asset management and bancassurance, as Alessandro Boratti, analyst at Scope Ratings, wrote last month.

A union between a Commerzbank union in Germany and UniCredit's HypoVereinsbank division could create synergies in capital markets, advisors, payments, and trade finance activity, according to JPMorgan analysts in a November note. However, they noted that such a union would produce only a "limited" advantage in funding, as the two banks' spreads already trade closely.

Banco BPM has complementary strength in asset management, closer to home, according to Scholtz. Alloatti stated that absorbing a domestic peer is one of the Italian lender's only remaining options to take a leading role on the home stage.

Intesa Sanpaolo, Italy's largest bank by total assets, is the only bank that could potentially be bought to bridge the gap with Banco BPM, according to Alloatti.

Hugo Cruz, a KBW Analyst, stated in emailed comments to CNBC that Banco BPM's acquisition by UniCredit has the "added value" of indicating to German shareholders that UniCredit has other M&A options available to it. Despite this, Cruz emphasized that the domestic acquisition bid is likely "mainly a reaction to the acceleration of the consolidation process in the Italian banking system," which was triggered by Banco BPM's acquisition of its Monte dei Paschi interest.

UniCredit may face high integration costs and an extensive toll on management time if it decides to absorb both of its takeover targets, prompting analysts to advise Orcel to choose between expanding abroad or remaining in Italy.

The Italian lender, which has experienced 15 consecutive quarters of growth and a 61% increase in its share price this year, has the option to remain independent.

"According to the statement, Mr. Orcel does not believe that UniCredit needs to acquire a bank. He stated that any acquisition must add value to UniCredit's standalone strategy, and if no acquisition is made, the bank will continue with its current strategy, which includes a high level of capital distribution for shareholders and the usage of excess capital by the end of 2027. Mr. Orcel noted that UniCredit abstained from bidding previously because it was still under restructuring and did not have the necessary currency for acquisition."

Morningstar's Scholtz stated that we hope they would exercise discipline and abandon both deals if they do not produce a return for shareholders.