Introduction
Intesa Sanpaolo SpA pulled off one of the biggest banking merger in Europe after the great financial crisis. The Intesa Sanpaolo’s takeover of UBI Banca has totally reshaped the Italian market, possibly giving life to a long-term consolidation of the country’s fragmented financial industry. Intesa Sanpaolo-UBI is an all stock deal; more than 90% of UBI investors tendered their shares in the offer. The $4.8bn takeover bid was initially launched on 6 July and it closed on 28 July. Intesa has also secured the antitrust act issued by the Italian Competition Authority (AGCM) after having revised the deal terms with the local rival BPER Banca.
UBI Banca: Company Overview
UBI Banca was founded on the 1st of April 2007, by the merger of BPU and Banca Lombarda e Piemontese.and is considered the fifth largest bank in Italy by number of branches. UBI Banca is listed on the Italian stock exchange and it is also included in the FTSE MIB index.
The presence is mainly national with a focus on the Nothern part of Italy. Nevertheless, the company also operates internationally thanks to representative offices located abroad and equity investments in foreign companies. UBI Banca is retail-focused with a traditional presence in SMEs’ and private clients’ areas. The bank has a long-term perspective based on sustainable development.
The company reported revenues of about $3,638bn (2019, a 3.4% increase YoY), pre-tax profits of $506.6m (2019), a $251m net income (2019), and 19,940 (2019) employees.
Intesa Sanpaolo: Company Overview
Intesa Sanpaolo S.p.A. is the most important Italian banking group and was founded through the merger of two Italian banking groups, Banca Intesa and Sanpaolo IMI. It is one of the main banking groups in Europe, counting a market cap of €34.8bn.
Intesa Sanpaolo is a global partner operating on a national and international scale through a sustainable and responsible business approach and is committed to supporting the economy in the countries where it operates.
Intesa Sanpaolo offers services in different areas: commercial banking, transaction banking, structured finance, investment banking and capital markets. Their clients range from corporations, to financial institutions and public finance-related clients.
The group offers its services to about 11.8 million customers using a network of around 3,700 branches which are present throughout the country with market shares of no less than 12% in most regions.
Intesa Sanpaolo has a strategic position internationally with 1,000 branches and 7.2 million customers
The company has revenues of $18.08bn (2019), a 1.5% increase (YoY), pre-tax profits of $6.593bn (2019), a $4.182bn net income (2019), and 91,478 (2019) employees.
Industry Overview
Europe’s banking sector has changed a lot over the past 20 years. Even though the EU countries have experienced, in the past, their own pace in restructuring the banking system, the common key aspect of every country is consolidation.
There were many reasons that led to a reshaping of the European banking industry, but the key drivers were innovation technology, disintermediation, deregulation processes, globalization of real and capital markets, and lastly the introduction of the European currency. As a matter of fact, it is possible to find a positive correlation between the increase in the number of M&A operations in the whole European banking industry and the initiation of the Monetary Union.
The Italian banking sector, at the beginning of the 2000, was characterized by a large amount of small and high skilled banks, which were deep-rooted in limited areas. The consolidation’s process, that began at the end of 1990s, affected almost half of the Italian banking system leading to a big reduction in the number of operating banks. In the time frame 1993-2014, indeed, the number of operating banks noted a reduction of 35% starting from 1037 and getting to 672. The most relevant falls occurred in 1993-1995, 1998-2004 and in 2007-2014, considering the last stage with the birth of big banking groups such as UniCredit S.p.A and Banca Intesa San Paolo. These groups from the beginning got a large market share in Italy. In 2017, indeed, the first five institutions detained a combined market share of 43,3%, with Intesa leading the way with a 20-25% of market share, followed by UniCredit with a 10-15% of market share. This index is pretty much in line with the average in Europe, even though there are many differences depending on the country. In Spain, for instance, the first five banks detained a market share of 63,7%, while in Germany just the 29,7%. Another trend, that happened in Italy as in Europe, was the reduction of the number of branches and occupants. Italy recorded a reduction of the number of branches by 33,1%, about 9600 branches, from 2009 to 2017. In the same period, the resources applied declined by 21,8% with a drop of 86,000 occupants in the banking industry. Nevertheless, at the end of 2016 the ratio between the number of branches per inhabitants was among the highest, with 50 branches each 100,000 inhabitants.
In Europe, the consolidation process primarily affects smaller institutions. Mergers between large banks are the exception, although the number of mergers is expected to rise. Europe recorded a reduction in the number of banks from 6,127 to 4,600 between 2007 and 2018. In every country the M&A operations were primarily domestic, with banks trying to gain a larger domestic market share and increasing their efficiency with economy of scale and diversification in order to compete and keep up with European leaders and Wall Street banks.
However, nowadays European banks are facing threats of becoming always less important, due to continuing weak earnings and outdated IT infrastructures. European players are in fact required to form the business of the future from the legacy they inherited in the past. This requires considerable investments and activities. Innovations are affecting financial services as it exists today mainly in five areas: primary accounts, payments, capital markets, investment management and insurance. The most visible innovations are platform based, data intensive and capital light. They also cross competitive lines. Rapidly advancing technologies, evolving customer expectations and changing regulatory landscape are opening doors to disruptive innovation in financial services. In addition, the entrance of big tech groups, such as Amazon and Facebook, into consumer financial services, threatens to steal bank customers and reduce their profit margin.
The European banking industry is completely different from the American one or the Asian one due to the lower capitalization of its banks. Only 7 European banks are among the top 20 banks, and only two make it to the top 10. Moreover, European banks are not only smaller, but also less profitable. Almost 10 years later the financial crisis they have averaged 7.2% in 2018, way lower than 10% achieved by Chinese banks and large US institutions.
For all these reasons, although most deals have been between mid-sized domestic lenders so far, such as the $5bn merger of Saudi British Bank and Alawwal Bank, it is becoming more frequent in Europe to wonder whether bank consolidation towards “national champions” or even “EU champions” ,with cross-border mergers, is necessary to ensure a stable supply of financial services to the economic area.
Deal Rationale
Intesa Sanpaolo’s takeover of UBI Banca is going to create a new European banking leader – the combination of Intesa and UBI will create the second-largest bank, for capitalization, in the Eurozone. After the COVID-19 pandemic, the need for large banks to increase their competitiveness induced the Italian government growth initiatives and this event is one of the drivers of the deal. Intesa Sanpaolo is deeply rooted in the regions in which it operates – Italy, and this acquisition will strengthen its position by increasing its size and market shares for loans and deposits.
Intesa agreed to sell a number of assets and branches of the combined entity to BPER Banca if the deal with UBI goes through. The plan is based upon three pillars:
- Buy UBI shares due to the P/TBV (price to tangible book value) ratio of Intesa which is near 1 despite P/TBV ratio of UBI whose value is less than 0.5.
- Sell for cash 523 UBI branches to BPER Banca and some insurance assets to UnipolSai group
- Use the negative goodwill (badwill) to cover integration costs and credits adjustments to quicken the de-risking without relevant implication for the main capital index
There are several benefits for the targets’ shareholders: the acquisition premium, the potential double dividends for UBI’s shareholders, an increase in EPS of 4-5% and a positive dividends’ outlook for the following years. Moreover, an expected ROE of 10% despite the 7% that UBI would have if merger does not go through.
The plan is set to maximize cost savings and achieve a target of €700m in synergies by 2024.
Deal Structure
A hostile takeover is when the acquisition of the target company by the acquirer is going directly to the target’s shareholders by making a tender offer or through a proxy vote. When a takeover is hostile the target company’s board of directors does not approve the transaction. In this case, Intesa Sanpaolo has made a tender offer in an all-share bid proposed on Monday 17th February worth €4.86bn ($5.3bn), which corresponds to a premium of more than 28% to the previous closing price of UBI Banca stock: that values UBI Banca at about €4.25 a share.
The initial offer consisted in paying 1.7 new Intesa shares for every 1.0 UBI shares tendered. At first Intesa Sanpaolo met resistance among UBI Banca’s core shareholders. UBI Banca’s board unanimously rejected the takeover bid citing that the bid was “inadequate” and added that it did not reflect its “fundamental value”.
Subsequently, UBI Banca started looking for alternative merger plans to fend off an unwanted bid from Intesa Sanpaolo and explored the takeover of Monte dei Paschi which was not immediately available. The bank originally aimed to become an acquirer of weaker rivals, rather than a target.
However, in the end Intesa Sanpaolo decided to add an additional €0,57 cash per share in a second offer to attract more acceptance by UBI’s investors. Intesa Sanpaolo secured Italy’s antitrust approval for UBI deal on Thursday 16thJuly. Intesa Sanpaolo agreed to sell 532 branches to BPER Banca, which means expanding the initial accord to sell 400-500 branches. The regulators decided not to disclose the deadline for the disposal, but they declared that Intesa must be ready to sell its own branches if it couldn’t sell UBI branches.
Furthermore, by having exceeded the threshold of 95% of the share capital of UBI Banca, Intesa Sanpaolo has now exercised its right to buy the remaining outstanding shares.
This operation represents the last step before the delisting of UBI Banca from Piazza Affari scheduled on October 5th, followed by the merger by incorporation of UBI. On Thursday 1st and Friday 2nd October, UBI Banca shares will be suspended from trading. UBI shareholders who have so far not accepted the two Intesa Sanpaolo offers will now be forced to sell UBI’s securities in their portfolio (“squeeze out”).
According to Bloomberg’s data, the deal represents the biggest European banking acquisition in the last 10 years. The combination of Intesa Sanpaolo and UBI will create Italy’s biggest bank, rapresenting a fifth of the loan market and a European lender with €8.7bn in net interest income and about €1tn in total assets. Moreover, combined profits are equivalent to €21.6bn, based on 2019 financial data.
Mediobanca, chosen by Intesa Sanpaolo, acted as sole M&A, and lead financial advisor will collaborate with J.P. Morgan, Morgan Stanley, UBS Investment Bank and Equita Sim while UBI Banca chose Goldman Sachs and Credit Suisse.
Click here to download the official report.
Key Sources and References: Companies Website, Reuters, Oliver Wyman, Financecommunity, Sole 24 Ore, CFI, Financial Times, Bloomberg, FinTech Features, Bluerating, Deloitte, KPMG, ECB, MarketScreener and other websites as illustrated in the official report
To contact the authors:
Andrea Donatello
Giorgi Mdivnishvili
Vladimer Choghoshvili
Dietmar Del Vecchio
Andrea Zenoniani
Francesco De Benedittis
Silvia Maifrini
Bocconi Students M&A Circle 
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