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Politics seen driving Intesa/Generali deal amid regulatory, financial questions

A takeover of Generali by Intesa Sanpaolo SpA would transform the landscape of Italian finance, but analysts doubt the wisdom of a merger and suspect that political pressures are playing a part in Intesa's decision-making.

Regulatory risks are an added complication to any potential takeover, with watchdogs likely to raise antitrust, competition and capital buffer questions, analysts suggested, and Generali for its part is resisting the idea of being acquired.

Speculation about a possible takeover of Generali first emerged in Italy's La Stampa over the weekend of Jan. 21, with the newspaper citing sources as saying a deal was in the works involving Intesa, France's AXA and Germany's Allianz Group. After Generali acquired a 3.01% Intesa stake in what was seen as an attempt to block a takeover, the bank advised markets Jan. 24 that it was eyeing possibilities including "possible industrial combinations" with Generali as it looks to grow its wealth management, private banking and insurance activities.

The main option under consideration is an offer of €3 billion of cash and €12 billion stock for a 60% stake in Generali, Affaritaliani.it reported Jan. 25. Intesa's largest shareholder, a banking foundation that owns roughly 9.3% of the lender, said it backed management and did not want to "interfere."

Generali, meanwhile, has not received an official bid from Intesa and is treating the bank's intentions as hostile, a person with knowledge of the matter told S&P Global Market Intelligence.

Intesa's interest is likely being driven by Italian government pressure to avoid Generali falling into foreign hands, said Luigi Tramontana, an analyst with Banca Akros in Milan. Interest from Allianz and AXA in taking over Generali has sparked consternation among Italian politicians about foreign firms controlling one of the country's most important companies.

"Probably the government is asking [Intesa] to intervene in order to avoid [a] foreign takeover," Tramontana said in an interview. "I think Intesa is acting on the back of political pressure."

There is little financial motivation for Intesa to carry out a deal, he argued, particularly given the pending removal in 2018 of Europe's so-called Danish compromise, which allows banking and insurance conglomerates to count capital tied in their insurance subsidiaries toward their common equity Tier 1 ratio. Intesa's CET1 ratio at the end of September 2016 was 12.83%.

"The potential synergies between banking and insurance activities are very limited," Tramontana said. "From a capital standpoint, the end of the Danish compromise in two years' time will put a significant strain on the conglomerate's capital position."

Break-up likely

If Intesa did end up acquiring Generali, it would almost certainly have to split up the insurer's Italian business, wrote analysts from Bernstein, a brokerage. The companies are already Italy's two largest life insurance providers — Intesa through unit Intesa Sanpaolo Vita SpA — and the combined entity would have a third of the Italian life market, which would "clearly raise competition issues," they noted.

"We think Zurich [Insurance Group Ltd.] would be a possible buyer for the rump of the Italian business, but would need to raise capital for this," they added.

Zurich Insurance declined to comment.

Reports have also suggested that Allianz could buy Generali's French business and AXA the company's German operations. But both deals would run counter to the mooted acquirers' investment strategies, Bernstein observed.

AXA has said it has €1 billion a year to spend on M&A and that it would target smaller and medium-sized deals, they wrote. Generali, however, wrote €6.35 billion of life premiums and €2.13 billion of property and casualty premiums in Germany during the first half of 2016.

"Our view is that AXA would be more interested in the German P&C business only," Bernstein said. "Generali's structurally challenged German life business would be very difficult to unload, with perhaps the only option being sale to a 'run-off' player."

Allianz, meanwhile, has indicated that it would prefer any smaller acquisitions to be focused on P&C insurance and asset management and bring only "incidental" life exposure, Bernstein said. But Generali's French division wrote €4.34 billion of life business and €1.37 billion of P&C in the first six months of 2016.

That would leave Intesa likely needing to off-load the French life business to another buyer, most probably a French bank, they added.

A break-up could present Generali shareholders with "significant upside," wrote equity analysts at UBS, adding: "We estimate 48-63% even after the recent share price spike. Any consortium bid could face political and regulatory challenges getting this done, but Intesa fronting a deal could be more palatable."

The Italian market makes up about 41% of Generali's business exposure, while France and Germany represent about 11% and 13% of the company's interests, respectively, UBS said. Intesa Sanpaolo's life businesses, which are focused on Italy, registered net premiums of €5.14 billion in the first six months of the year; Generali wrote €9.42 billion of gross written life premiums in that same span.

But the merger would be difficult, as Generali's insurance business is designed as a retail insurance operation and not in the bancassurance mold, said an analyst who covers French insurers and asked not to be named.

"I don't really understand the rationale for the deal," he added.

CreditSights also doubts that a deal will go ahead. Its London-based analysts wrote in a note: "We believe that a potential joint takeover by Intesa and Allianz is unlikely to occur considering the complexity of such a deal, including the competition and antitrust green lights that would be required."

But there is at least some logic in the deal, they added.

"An acquisition by Intesa could potentially make sense, as the bank would benefit from the strong cashflow of the insurance business, although combinations of banks and insurers have a mixed track record in Europe," they said. "Generali suffers from a weak capital structure from both a quantitative and qualitative perspective."

Generali shares continued to advance in Jan. 25 trading, although a rise of about 1% fell short of the 4% and 8% gains recorded Jan. 23 and 24. Intesa was up 0.35% on Jan. 25, having fallen 2.9% and 4.4% the previous two days.

Mediobanca, UniCredit could become involved

But the day's biggest gainer on Italian markets was another bank that has been linked to the Intesa speculation: UniCredit SpA, which was up nearly 9%. Brokers cited by the Financial Times suggested that Intesa's ambitions could go beyond a Generali acquisition to a takeover of Mediobanca SpA, the influential investment bank that is Generali's largest shareholder with a 13% stake.

UniCredit owns 8% of Mediobanca and is part of its core shareholder pact. It is also slated to raise €13 billion of fresh capital in the near future.

The person with knowledge of the matter rejected the speculation, saying the bank "has its own plans to raise equity" and "is not involved in any of this."

Italy's market regulator also declined to comment; it was reported to have summoned executives from Generali, UniCredit and Intesa to gauge their plans.

Generali is facing internal upheaval as well as external pressure: The company announced on Jan. 25 that CFO Alberto Minali is stepping down. Minali has clashed with Philippe Donnet since the latter beat him out in the race to replace Mario Greco as CEO.