how UniCredit constructed its Commerzbank stake

Andrea Orcel surprised Germany final week by elevating UniCredit’s stake in Commerzbank from 9 per cent to 21 per cent in a manoeuvre that mirrored techniques made infamous in hostile takeover battles greater than a decade in the past.

When carmaker Porsche and automotive provider Schaeffler Group got here for German blue-chips Volkswagen and Continental in 2008, they constructed their stakes by stealth. Again then, there was no authorized obligation to reveal positions constructed by way of spinoff devices that assured entry to shares solely at a later cut-off date.

The loophole in EU disclosure guidelines has since been closed, making large-scale secret stakebuilding not possible.

For Orcel, a former M&A banker and now chief govt of UniCredit, the stricter disclosure guidelines for monetary derivatives offered a distinct alternative: UniCredit has been capable of disclose a 21 per cent stake in Commerzbank whereas complying with guidelines that, for now, block it from proudly owning greater than 10 per cent.

“Suppose what chances are you’ll however that is simply superbly performed,” stated one Frankfurt-based banker.

On the core of the commerce is an arbitrage between two rule books.

Eurozone legal guidelines governing financial institution possession and management imply nobody should purchase greater than 10 per cent of a lender with out first getting the inexperienced gentle from the European Central Financial institution.

Approval could also be a formality for an EU-based financial institution resembling UniCredit, which had already stated it could search ECB consent after buying its first 9 per cent stake. However the course of can take months, which permits rivals to construct their very own positions, hedge funds to snap up shares and a goal to buttress its defence.

Nonetheless, ECB acceptance is barely required for UniCredit to take management of voting rights connected to Commerzbank shares. The principles neither cease the Italian financial institution from gaining financial publicity to the goal’s inventory beforehand nor ban the signing of contracts now to obtain the shares after central financial institution approval.

Disclosure guidelines for share possession within the securities legal guidelines enacted after the Porsche and Schaeffler tussles have a distinct focus: they require an investor to disclose the place when it owns — immediately or not directly by way of derivatives — an financial curiosity in 5 per cent of the shares or once they hit larger thresholds, certainly one of which is 20 per cent.

This discrepancy allowed Orcel to disclose an enormous bounce in UniCredit’s stake in Commerzbank, taking it from a minority investor to leapfrogging the German authorities as the one largest shareholder. Its place can also be sufficiently big to make it troublesome for potential rivals to make a counter-offer for the German financial institution, ought to it determine to pursue a takeover.

On the core of the transaction are contracts UniCredit entered with Barclays and Financial institution of America, in accordance with voting rights disclosures and bankers acquainted with the offers.

Each funding banks struck so-called whole return swap agreements with UniCredit, in impact committing to copy the financial efficiency of Commerzbank’s inventory. If the German lender’s shares go up, or the financial institution pays its dividend, the counterparties pays the change in worth to UniCredit. If the inventory goes down, UniCredit should cowl the distinction.

Barclays and BofA additionally dedicated to bodily ship the Commerzbank shares to UniCredit later, ought to the Italian lender nonetheless need them. Whereas the banks have purchased a couple of Commerzbank shares immediately, they hedged their commerce principally by way of put and name choices, in accordance with disclosures.

4 individuals acquainted with the deal say the 2 funding banks will every make €12mn in charges and different earnings on the commerce, which has a notional worth of €2.3bn. The earnings every financial institution stands to obtain may rise to €40mn-€50mn if the contracts are prolonged past 2026 or in any other case modified, they stated.

Individuals acquainted with UniCredit’s considering stated the charges had been “far decrease”, with out elaborating.

“In itself, a complete return swap just isn’t a really advanced transaction and comparatively easy from a technical viewpoint,” stated former senior Deutsche Financial institution derivatives dealer Pius Sprenger.

However “making use of it on such a big scale as within the Commerzbank case required numerous dedication”, stated Thomas Schweppe, a former Goldman Sachs M&A banker and founding father of Frankfurt-based investor advisory boutique 7Square.

And final week’s 11.5 per cent whole return swap was removed from step one in Orcel’s pursuit of Commerzbank.

Preparations to amass the German financial institution began again in 2023 when the Italian lender silently constructed a direct stake of just below 3 per cent, stated two individuals with direct data of the matter, hovering under the primary disclosure threshold for direct holdings.

In August 2024, when rumours began to flow into that the German authorities might quickly begin promoting down its 16.5 per cent stake, UniCredit acquired one other 1.7 per cent by way of a a lot smaller whole return swap, nonetheless sitting under the 5 per cent threshold for mixed direct and oblique positions.

Then on the evening of September 10, the Italian financial institution purchased one other 4.5 per cent from the German authorities when it outbid monetary traders in a block commerce, clearing the 5 per cent disclosure threshold for the primary time and subsequently revealing its 9 per cent place. By September 23, it had transformed the preliminary, smaller whole return swap into shares.

On the identical day, UniCredit entered two a lot bigger whole return swaps, regarding stakes of 5 per cent and 6.53 per cent, that can expire in 2026. A two-year train interval — for much longer than the anticipated six to 12 months timeframe for acquiring regulatory clearance — exhibits the Italian financial institution is “affected person”, stated one insider.

UniCredit negotiated the derivatives with out exterior advisers, counting on in-house experience, stated individuals with data of the scenario.

UniCredit’s fairness and credit score gross sales and buying and selling crew is headed by derivatives specialist Salvatore “Chicco” Di Stasi, who joined from UBS final yr and beforehand labored at Goldman Sachs.

“He has one thing that you simply don’t [often] discover in a big industrial financial institution, nor in UniCredit . . . He’s very, very artistic so far as structuring is anxious,” one former colleague stated.

Complete return swaps can include dangers. In the course of the 2008 monetary disaster, massive drops in VW and Continental shares left Porsche and Schaeffler Group uncovered to large losses when their spinoff stakes misplaced billions of euros in worth.

Orcel has eradicated that threat with one other layer of monetary engineering, stated individuals acquainted with the transaction. He’s utilizing a so-called collar to hedge the Commerzbank place in opposition to share worth declines, whereas additionally waiving massive components of the upside.

The construction — consisting of opposing name and put choices — in impact locks in final week’s Commerzbank share worth.

The cautious stakebuilding served to underscore Orcel’s seriousness about gaining management of Commerzbank regardless of political opposition.

Revealed days after the German authorities introduced it was pausing gross sales of its remaining stake in Commerzbank within the wake of UniCredit’s preliminary stakebuilding, one insider stated Orcel had used the commerce to ask: “Are you able to hear me now?”

One other banker acquainted with the deal stated Orcel used the derivatives to “stroll the discuss”, with the place underpinning his verbal curiosity in Commerzbank.

Hedging the draw back to the Commerzbank commerce backs Orcel’s declare he may stroll away from his pursuit of the German group, the banker stated.

Whereas such an announcement may result in a steep fall in Commerzbank’s share worth, UniCredit’s losses can be restricted. Equally, if a future cope with the German financial institution did undergo, Orcel may take full possession of the underlying 11.5 per cent stake at its mid-September worth with out having to pay a significant takeover premium.

UniCredit’s trades have additionally made it far more durable for potential rivals resembling Deutsche Financial institution, BNP Paribas or ING to construct the same derivatives place in Commerzbank.

Whereas Commerzbank is a extremely liquid inventory, near a 3rd of the whole market capitalisation is tied up: 12 per cent is owned by the federal government, and 21 per cent is managed by UniCredit.

As one German banker stated: “For everybody else, mustering a counter bid has grow to be rather a lot more durable.”