Finance

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Intesa Sanpaolo SpA’s interest in combining with insurer Assicurazioni Generali SpA has no obvious logic to it. If the lender has a cunning plan to make it work, it needs to reveal it.

For now, Intesa says simply that it’s considering “industrial combinations” with Generali. It cites a desire to expand in asset management, private banking and insurance. A full combination would be worth 61 billion euros ($65.5 billion) based on the pair’s market values on Friday before the idea leaked.

A Proper Casualty
Generali has lagged peers over the last three years, making it vulnerable to a bid
Source: Bloomberg

Generali would bring some asset management and banking to Intesa but most of its assets are in insurance. The so-called bancassurance model of selling insurance through banking networks is hard to get right. Moreover, Generali sells through agents so it’s not clear how this would gel with Intesa’s branch-based distribution.

Intesa has emerged as a clear winner in Italian banking. Without a convincing reason to buy Generali, any deal would just weaken its own investment case. That matters for both sides. A transaction would have to be in shares. Generali investors may be long-suffering, but switching into a Intesa-Generali would be attractive for them only if the terms delivered a tasty premium by handing them an outsize share of the company.

Yet it’s hard to see how a simple Intesa-Generali combo could create enough value to justify much of a premium given the limited opportunity to cut costs between the two operations.

One way Intesa could make the deal pay would be by selling parts of Generali to other European insurers for premium prices. The French and Italian general insurance businesses might appeal to Allianz SE and Axa SA, for example. These are worth more than 6 billion euros, according to UBS estimates. Zurich Insurance Group AG, run by former Generali CEO Mario Greco, might also want to snap something up.

But if Generali is in such bad shape that it should be broken up, then it should do this by itself. If the idea is to keep it from a full takeover by a foreign buyer such as Allianz of Axa, that comes at high price. Generali disappears either way, while Intesa becomes a more risky entity, its management distracted for years.

Generali has picked up 3 percent of Intesa’s voting rights in a move which, under Italian securities law, prevents Intesa from gaining influence over Generali through stake-building. The better defense would be to demonstrate how Generali can turn its discount valuation back to a premium. UBS analysts reckon it is worth 31 billion euros on a sum-of-the-parts basis, based on its divisional returns relative to the cost of capital. That compares with 21 billion euros prior to the leak. 

Break Me Up Before You Go-Go
Generali's sum-of-the-parts value is in excess of its 25 billion euros market capitalization
Source: UBS research estimates

Generali's poor governance has long hampered its performance. Greco brought hope but lasted only three years. The insurer's current management, led by CEO Philippe Donnet, has made an underwhelming start. His plan envisages reducing Generali’s 5.5 billion euro cost base by just 200 million euros by 2019. A disposal program seeks just 1 billion euros of proceeds. The obvious course would be more aggression on asset sales and cost-cutting, leading to a smaller but stronger Generali with a higher stock-market rating.

This is essentially a battle about who should run Generali and unlock its value. Its shareholders may be desperate for improvement. But Intesa CEO Carlo Messina has a Herculean task showing why this is his job.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net