Analysis-UniCredit closes in on Commerzbank as battle enters endgame

By Tom Sims and Valentina Za

FRANKFURT/MILAN, July 8 (Reuters) - One of Europe's most cantankerous banking battles in decades is becoming more a question of how and when, not if, UniCredit secures its prize, after it disclosed it was nearing control of Germany's Commerzbank in its €45 billion ($51 billion) hostile deal.

The Milan-based bank led since 2021 by CEO Andrea Orcel on Wednesday revealed it now owns 48% of the German lender's shares after it launched a low-ball takeover offer for Commerzbank in May.

It has not been easy. UniCredit first invested in Commerzbank in September 2024, launching a nearly two-year tug-of-war that pitted Italy's and Germany's No. 2 banks against each other.

German opposition to Orcel's overtures has been widespread, and the deal encapsulates the difficulty of merging large banks across euro zone countries despite central bankers wanting more tie-ups to compete with bigger American rivals.

Commerzbank responded to Wednesday's news by saying less than 2% of retail and institutional investors had tendered their shares, with most coming from "banks and parties connected to UniCredit" which underscored the deal's "low attractiveness".

But UniCredit and its CEO are gaining a momentum even critics admit appears unstoppable.

Boris Rhein, the premier of Commerzbank's home state of Hesse, on Wednesday called on the banks to talk.

"The priority now is to find common ground and engage in constructive dialogue at the highest levels of management," he said in an emailed statement.

ORCEL'S OPTIONS FOR NEXT MOVE

All eyes are on Orcel's next move. His options include amending some swap contracts UniCredit holds to get to 59% of Commerzbank, buying shares on the open market once the approval process is complete next year, or engaging in talks with Commerzbank about a deal.

Both parties say they are willing to sit down, though they have been unable to find common ground so far.

Orcel could force through a merger with 75%, but with Berlin still owning 12% it would be left to contend with the government and other minority shareholders.

Commerzbank executives who have fought for months to keep their lender independent now stress the need to get a better premium for shareholders, some of whom say they would tender their shares if the price were right.

"It's inevitable that UniCredit will gain a majority stake here and that the whole thing will go through. It's just a matter of time," said Manfred Pointke, the founder of MPPM, an investor in Commerzbank.

Pointke hasn't yet sold his Commerzbank shares to UniCredit, but said he probably would if the price were €45 or €47, compared with the offer price of under €40.

Orcel expects the European Central Bank will soon determine that UniCredit has de facto control of Commerzbank. Doing so at a time when UniCredit has less than 50% of shares will cost it more in capital than if it had majority control.

Crossing the 50% threshold is also necessary if UniCredit is to name half of Commerzbank's supervisory board members, as Orcel has suggested it could do.

"It is increasingly likely that UniCredit will now have to consolidate it post the tender offer and ECB approvals (and reverse the buyback deduction booked for 2025)", Citi said this week.

CHALLENGES AHEAD

Yet reaching the finishing line for Orcel is not guaranteed.

One complication is the wave of banking M&A in UniCredit's home market, where rivals are consolidating.

Going all-in on Commerzbank would limit its financial ability to participate, pushing UniCredit further down the national ranking.

Then there is German opposition, which former UniCredit employees involved in its purchase of Germany's HVB two decades ago said could get the bank mired in bureaucratic hurdles.

If Orcel cannot convince Commerzbank or Berlin to talk, he could end up owning most shares but not yet able to push through the full merger he desires.

Thorsten Beck, director of the Florence School of Banking and Finance, described Orcel's "creative destruction approach" as "a bit like the 'elephant in the porcelain shop'".

"Yes, there is indeed a big risk that this will not work out well for UniCredit. Then again, in finance, money often wins the day, and I can imagine senior management at Commerzbank falling in line once everything is done," he said.

($1 = 0.8768 euros)

(Reporting by Tom Sims and Valentina Za; Editing by Tommy Reggiori Wilkes and Jan Harvey)