Banking Italian Style
Italy's Banca Popolare di Lodi, with its modest $3 billion market capitalization, is a bit player in European finance. Until recently the lender, based in the Lombard city of Lodi, was notable only for its acquisitions of much smaller players. But Lodi's surprise maneuver on Apr. 29 to take over Banca Antonveneta, a bank three times its size, has changed all that and put Lodi in the headlines. The brash bid for the bigger bank threatens to thwart an existing $8.1 billion offer by Dutch giant ABN-Amro Holding (ABN ), which had unsettled Italian power brokers eager to keep the country's banks in local hands. That's why the battle for Antonveneta is fast becoming a test case for the staying power of Italian-style capitalism and the future of finance regulation in Europe.
Many financial experts see Lodi's last-minute gambit as a ploy by Italy Inc. to prevent Antonveneta from succumbing to the Dutch bid, thereby opening Italy's fragmented banking industry to foreigners eager to court the country's affluent consumers. Bank of Italy Governor Antonio Fazio is widely viewed as the champion of efforts to stave off foreign suitors, although central bank officials would not comment on allegations that Fazio is favoring Lodi. If ABN-Amro's bid fails, it won't be the first time a foreign bank has walked away empty-handed. In 1999, Spain's Banco Bilbao Vizcaya dropped efforts to merge with Unicredito after getting negative signals from the Bank of Italy.
This time around, critics of the central bank point to a one-month delay in its approval of ABN-Amro's request to raise its stake in Antonveneta to 30%. By the time Fazio gave the Dutch bidder the green light, on Apr. 28, rival Lodi -- which had also asked for permission to increase its stake -- had already snapped up 29.5% of Antonveneta's shares and gained control of 51% percent together with its allies. Then in a dramatic coup on Apr. 30, Lodi and its backers proceeded to oust Antonveneta's entire board, which had favored the ABN-Amro bid, replacing its members with friendlier faces. "They should not have been allowed to take power in this way," says Umberto Mosetti, a partner at Deminor, a corporate governance specialist that represents some small shareholders in Antonveneta.
The maneuvering prompted Italy's stock market regulator Consob to launch an investigation into whether Lodi illegally colluded with other investors to build up a stake of more than 30% without making a full cash offer, as the law requires. If Consob determines it did, Lodi and its allies will be forced to fork out cash -- instead of paper -- for the Antonveneta shares they don't already own. A spokesman for Lodi declined to comment on the Consob investigation, alleged favoritism, or any details about its bid or financing.
Meanwhile, Antonveneta's Dutch suitor shows no signs of backing down -- despite the roadblocks being set up before it. ABN-Amro has filed legal challenges against Lodi and the Bank of Italy. European Union internal market officials have also sent Fazio letters seeking clarification of his position on the openness of Italy's financial markets to foreign bank takeovers. "It's ludicrous the way Italy's bank regulators are behaving," says Stilpon Nestor, a member of the European Commission's expert group on corporate governance and company law. "That's where the huge failure is."
Equally ludicrous, some financial analysts say, is the notion of tiny, debt-laden Lodi taking over a much bigger bank. It is already straining under the weight of a $12 billion debt load from its earlier mergers and acquisitions spree, giving it a debt-to-consumer deposits ratio of 1.09 -- nearly triple the Italian average (table). Last year, the bank posted a $218 million profit, but to finance the acquisition of Antonveneta, Lodi has said it will need to raise more capital -- partly through a $1.9 billion bond issue. That would come on top of a $388 million float just completed in March.
All that debt is pinching Lodi's "Tier 1" capital ratio, which fell from 6.4% late last year to an estimated 3.2% in mid-April, according to an Apr. 19 report by UniCredito's brokerage unit, Unicredit Banca Mobiliare. If true, that's below the 4% legal limit. The drop hasn't escaped the notice of credit-rating agencies. Fitch Ratings, which has a BBB+ rating on Lodi's debt, put the bank on negative watch on Apr. 29. "This reflects our concerns over the potential strain on Lodi's capitalization, and over the execution of the plan," says Christian Scarafia, an analyst at Fitch.
Little wonder that some are questioning the bank's motives in its bid for Antonveneta. After all, Lodi CEO Gianpiero Fiorani had assured analysts just six months ago that his bank would not be making any more near-term acquisitions. Yet one thing Lodi has going for it is the likelihood it won't be allowed to go under, Italian finance experts say. That's because the Bank of Italy remains a steadfast lender of last resort to the country's banks.
Still, ABN-Amro won't walk away without a fight. And for many observers, the outcome of the Antonveneta contest will determine whether Italian finance makes a leap into the 21st century -- or keeps one foot planted in the last one.
By Gail Edmondson in Frankfurt and Maureen Kline in Milan