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Breakingviews

Breakingviews - UniCredit spinoff offers a 3 bln euro reward

Italy's largest bank UniCredit is pictured in downtown Milan September 12, 2013.

MILAN (Reuters Breakingviews) - Breaking up UniCredit could hand its shareholders a 3 billion euro reward. Chief Executive Jean Pierre Mustier is accelerating plans to separate the 16 billion euro bank’s Italian assets from its Germany-centred foreign business, Reuters reports. A spinoff could boost the stock by up to 20%. In a deal with Commerzbank or BNP Paribas, the returns could be even higher.

Even after a deep clean since Mustier became CEO in 2016, UniCredit’s stock is languishing. At 28% of its tangible book value, Italy’s second largest bank is valued only a little more highly than weaker, smaller domestic rivals like Banco BPM and Banca Monte dei Paschi di Siena. Investors unfairly penalise UniCredit for its Milan base even though it made some 60% of revenue abroad last year. Its Italian exposure also deters foreign suitors and pushes up funding costs.

Turning back the clock on UniCredit’s 2005 acquisition of Munich-based HVB, and creating two listed companies, would allow investors to value each part more clearly. Without its European business, the Italian rump would trade more cheaply. But that would be more than offset by higher valuations for the rest - which would likely include operations in faster-growing eastern European countries, as well as investment banking, Germany and Austria - especially if it lists in Frankfurt.

Assume the Italian business trades at about 25% of tangible book value, just above smaller domestic peers. With a likely book value of around 20 billion euros based on its current share of group revenue and Refinitiv estimates, it would be worth perhaps 5 billion euros. The foreign operations’ more than 4% return on capital in the first half of 2020 would suggest a market capitalisation of at least 40% of their estimated 34 billion euro book value. That’s 14 billion euros. Shareholders would be left with two banks worth a combined 19 billion euros.

A spinoff could also offer Mustier a stepping stone for dealmaking. Merging the new HVB with, say, Commerzbank, would create scale, and cost savings. Selling to a larger foreign player such as BNP Paribas would command a control premium, perhaps 30%. It would be costly and complex. Mustier would also need to get buy-in from his future chairman, former finance minister Pier Carlo Padoan - named on Tuesday to the job - and persuade the Italian government. Yet the reward for investors is clear.

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