Ghizzoni Rights Offer Gamble May Win UniCredit Reprieve

UniCredit SpA CEO Federico Ghizzoni
UniCredit SpA Chief Executive Officer Federico Ghizzoni. Photographer: Giuseppe Aresu/Bloomberg

UniCredit SpA Chief Executive Officer Federico Ghizzoni is buying time to rescue Italy’s biggest bank as the country teeters on the brink of recession.

The lender, which will complete a 7.5 billion-euro ($9.8 billion) rights offer Jan. 27, received preliminary indications that individual investors will subscribe to almost all the stock available, two people briefed on the transaction said. UniCredit is also offering to buy back as much as 3 billion euros of bonds to boost capital.

Ghizzoni, 56, bet investors would recognize that the bank’s valuation, at a 23-year low this month, doesn’t reflect its potential after the European Central Bank’s record cash injections last month. If the rights offer is successful, Ghizzoni will be able to meet regulators’ demand that his bank raise 8 billion euros of capital. If he fails, the lender may be forced to unravel some of the $60 billion of acquisitions it made in the past decade or face nationalization.

“Italy had dropped into the dirty-laundry basket, and confidence is now returning, thanks to the ECB’s commitment of unlimited access to funds,” said Guy de Blonay, a London-based fund manager at Jupiter Asset Management Plc. Failure to raise capital would result in “the equity value going down to zero, and the lender would be taken over by the government.”

Record Loss

UniCredit, which posted a record 10.6 billion-euro loss in the third quarter, is tapping shareholders for the third time in as many years after European regulators imposed higher capital targets as government bonds plummeted. The bank owns about 39 billion euros of debt issued by Italy, the second-most indebted nation in the European Union.

UniCredit offered today to repurchase Tier 1 and Tier 2 bonds from investors, who have until Feb. 3 to accept the offer. They will receive 50 percent to 87 percent of the face value, depending on the securities.

“It’s another step to recapitalize itself,” aimed at boosting the core capital ratio, analysts at Banca Akros wrote in a note. “We were expecting such moves by the Italian banks to optimize their capital positions,” they said.

UniCredit rose 4.8 cents, or 1.3 percent, to 3.80 euros in Milan trading today, valuing the company at 22 billion euros.

To entice investors, Ghizzoni promised a reorganization intended to cut costs and boost profitability as the Milan-based bank focuses on four core countries: Italy, Germany, Austria and Poland. The lender said it plans to eliminate 6,150 jobs in Europe through 2015, about 4 percent of the worldwide total, and wind down 48 billion euros of non-strategic assets, including commodity divisions in Asia and the U.S. It closed its European stock-trading and research unit in November.

Government Aid

“A rights offer is basically the only thing UniCredit could do to survive,” said Matthias Fankhauser, a fund manager at Clariden Leu in Zurich. “In the current environment, it will be very difficult for them to sell assets.”

A spokeswoman for UniCredit in Rome declined to comment.

Regulators demanded that lenders boost capital to protect against future financial crises and achieve a core Tier 1 ratio of 9 percent by June. Failing to raise the funds privately by that date would leave lenders no option other than seeking government aid, according to the European Banking Authority.

Ghizzoni, who became CEO in September 2010, is seeking 1.5 billion euros in savings by 2015, mostly in Western Europe, as he aims to restore annual profit to 6.5 billion euros and boost return on tangible equity to about 12 percent, up from 3.6 percent in 2010. UniCredit’s five-year average return on equity of 7.9 percent is about half the 14.6 percent median of the 43 companies tracked by the Bloomberg Europe Banks and Financial Services Index.

Italy to Kazakhstan

Under the leadership of corporate and investment-banking chief Jean Pierre Mustier, the former head of Societe Generale SA’s investment-banking business, UniCredit is seeking to increase fees it receives from corporate borrowers by selling them more investment-banking services.

“The new business plan could create a second opportunity for a turnaround,” Deutsche Bank AG analysts wrote in a note to clients Jan. 17.

Ghizzoni is trying to salvage acquisitions made by his predecessor, Alessandro Profumo, including Germany’s HVB Group and Rome-based Capitalia SpA. The lender, whose reach stretches from Italy to Kazakhstan, had to write down 8.7 billion euros of goodwill on the purchases and its investment-banking unit in the third quarter, triggering the record loss.

Second Recession

“Ghizzoni has gained time to reorganize and improve efficiency after the wave of purchases,” said Maurizio Binelli, chief investment officer at Marzotto SIM SpA in Milan. “By being present in many countries, UniCredit could benefit from a greater fiscal and economic integration.”

Investors last year pushed UniCredit’s shares 59 percent lower as threats to the euro region’s currency union raised concern that the bank’s holdings of Italian sovereign debt threatened its stability. UniCredit told investors in the prospectus for its rights offer that they should weigh the possibility the euro may be abandoned.

Italy is poised to enter its second recession in three years. The economy may contract as much as 1.5 percent this year in a worst-case scenario, the Bank of Italy said Jan. 17. The country’s credit rating was cut two levels Jan. 13 by Standard & Poor’s, which said “a difficult external financing environment will have negative implications for growth performance.”

Investors are being offered two new shares of UniCredit at 1.943 euros each for every one they already hold. That’s 48 percent below yesterday’s closing price of 3.752 euros in Milan trading indicating shareholders will probably exercise their rights to reap immediate gains.

Individual Investors

Individual investors in Italy already have ordered 98 percent of the stock available to them, according to the two people with knowledge of the transaction who declined to be identified because the matter is private.

Institutional shareholders are divided. Aabar Investments PJSC, the Abu Dhabi-based sovereign-wealth fund, said it plans to increase its stake in UniCredit to 6.5 percent through the rights offer, which would make it the bank’s biggest investor. Capital Research & Management Co., a Los Angeles-based investment fund, increased its stake to 5.4 percent, becoming the second-largest investor. Libya’s central bank won’t increase its 5 percent stake as it wants to focus its funds at home, Ali Shanbish, head of planning at the country’s central bank, said in an interview Jan. 22.

Banking Foundations

UniCredit’s oldest shareholders, the country’s banking foundations, which hold more than 10 percent of the lender, aren’t exercising all their rights to buy stock.

Fondazione Cariverona, owner of a 4.2 percent stake, said last month that it won’t exercise its rights to buy shares in full, while the Banco di Sicilia foundation, owner of a 0.3 percent holding, won’t buy any more stock in the offer, the newspaper La Repubblica reported Jan. 8, citing Chairman Giovanni Puglisi.

A group of 26 underwriters led by Charlotte, North-Carolina based Bank of America Corp. and Milan-based Mediobanca SpA have agreed to buy any stock investors don’t buy, guaranteeing UniCredit will raise the funds it’s seeking.

The stock sale, Italy’s biggest in almost three years, is testing demand for banking stocks as Greece seeks an accord with bondholders on a debt swap needed to secure a second financing package for the cash-strapped country. The region’s finance ministers on Jan. 24 declined to give Greece more public money and called on bondholders to accept deeper losses, bringing the debt negotiations to another stalemate. Failure to reach a deal may yet scupper UniCredit’s offering.

“A failure to sell stock would have a negative impact on the whole banking industry in terms of costs, and it would make it much harder for the lenders to raise capital,” said Angelo Drusiani, who manages about 3 billion euros at Banca Albertini Syz & C. in Milan. “There’s only a very small chance this would happen. This is an excellent chance to invest in Italy at low prices.”

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