The gloves are coming off in Europe’s biggest banking takeover

[MILAN/FRANKFURT] The handshake on Mar 26 was cordial. After more than a year of increasingly rancorous back and forth, Andrea Orcel, the CEO of UniCredit, and Bettina Orlopp, his counterpart at Commerzbank, had finally come together to discuss what a potential combination might look like.

Over the course of two meetings, each lasting more than two hours, Orcel indicated he wanted Commerzbank to focus more on Germany and Poland and scale back lending in other parts of the world, which he considered risky, according to sources familiar with the matter.

Orlopp disagreed with the numbers presented by the Italian and pushed back against his proposal for joint working groups to address differences, wary of giving too much information to a rival who had taken the bank’s stakeholders by surprise before, the sources said.

If there had been a sense that both sides could find common ground, it evaporated quickly. On Monday (Apr 20) morning, Orcel slammed Commerzbank as “a story of operating underperformance” that will likely need to go through yet another painful restructuring without a deal.

Orlopp, who had declared the failure of the talks already earlier in April, hit back in the evening, with Commerzbank issuing a statement that called Orcel’s restructuring proposal “a speculative attempt to dismantle” its “successful business model”.

The hardening stance sets the stage for the decisive phase in a hostile takeover battle that started almost two years ago, but whose genesis goes back much further. Orcel, who has amassed just under 30 per cent of Commerzbank and last month unveiled a 35 billion euros (S$52 billion) low-ball offer, is hoping to eventually pull off one of Europe’s largest bank acquisitions ever and a rare cross-border deal that could reshape the bloc’s financial landscape. A combination would turn UniCredit into a dominant force in Germany, Europe’s largest economy, and potentially unlock a flurry of other transactions.

Orlopp has so far succeeded in keeping the Italian at bay, helped by vocal support from the German government, which has rejected UniCredit’s approach as “unacceptable” and criticised the way that Orcel built UniCredit’s stake. Yet with practically all of Commerzbank’s profit now being paid out to investors, and tailwinds from higher interest rates fading, the key question is how much longer her defense will work and what, if anything, the government can do to prevent a deal.

Orcel is “already in a position where he can keep increasing pressure over time, building the stake, going to shareholders, and effectively forcing the outcome”, said Cole Smead, who runs investment firm Smead Capital Management, an investor in UniCredit. “This does not go away. It becomes an ongoing squeeze on management until the structure changes.”

This account of the takeover battle and the views of both sides is based on interviews with sources familiar with the matter who asked for anonymity to discuss private conversations. Spokespeople for Commerzbank and UniCredit declined to comment.

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Orcel’s latest chase of Commerzbank dates to at least 2024, when UniCredit quietly built a stake and then used a government auction to increase it. But his interest in the German lender goes back much further, a quarter century, to his time as a young investment banker at Merrill Lynch.

In 2001, Orcel had an informal role advising UniCredit’s CEO at the time, Alessandro Profumo, on a potential combination with the German bank. After months of preparatory work, senior executives from both lenders gathered to test the idea, but the talks quickly stalled. Soon after, the Sep 11 terrorist attacks on the US reverberated through markets and the deal disappeared from the agenda.

In the following years, the idea of a UniCredit-Commerzbank combination resurfaced periodically, often in investment bankers’ pitch books. A more concrete attempt came in 2017, when then-UniCredit CEO Jean Pierre Mustier opened talks, only for them to falter again.

After Orcel succeeded Mustier in 2021, he quickly revived the idea. About a year into his tenure, Orcel made an initial overture, engaging with then Commerzbank CEO Manfred Knof. UniCredit even built a stake of around 5 per cent at the time, sources familiar with the matter said, a move that has not been previously reported. Orcel reversed course, however, because Russia’s invasion of Ukraine had upended markets and priorities.

By 2024, UniCredit circled again. There were growing expectations that the German government would look to sell down its remaining stake. Against that backdrop, Orcel held a series of meetings with Knof that UniCredit interpreted as supportive, according to a source familiar with the matter.

The former CEO has faced questions for meeting with Orcel shortly after the Sep 2024 deal, allegedly without knowledge of Commerzbank’s board and management.

Knof did not respond to a request seeking comment.

That year, UniCredit moved to quietly build a position of around 5 per cent over the summer, and then used a government auction to increase it. When it disclosed in September of 2024 that it owned around 9 per cent in Commerzbank, with a full takeover one potential option being considered, the backlash was immediate.

The government said that it was surprised and criticised the move as unwelcome, as did Commerzbank. Knof was replaced by Orlopp, Commerzbank’s former chief financial officer.

For Berlin, a tie-up would be difficult to sell to voters because of potential job losses. Labour unions fear that more than 10,000 jobs at Commerzbank could be cut, with additional jobs at risk at UniCredit’s Munich-based HypoVereinsbank unit, which the Italian lender acquired about two decades ago.

UniCredit on Monday said that it would shrink Commerzbank’s headcount in Germany by about 7,000, and significantly less if the two banks combine.

The government, which still owns more than 12 per cent of the Frankfurt-based bank, is also wary of losing influence over a firm seen as key to financing the country’s Mittelstand, the small and medium-sized corporations that are the backbone of the country’s economy. Many of them are still family-owned and rely on bank financing more than on capital markets.

“Yes, we need large banks in Europe, but that doesn’t mean that every form or type of takeover is welcome in Germany,” Chancellor Friedrich Merz told a gathering of the Association of German Banks in Berlin on Monday. Without explicitly naming Commerzbank, he made clear that his reference was to “recent events”.

Orcel’s move is viewed more favourably in Rome, which is open to moves that strengthen the Italian banking sector and bring closer ties to the German market, sources familiar with the matter have previously said. The step also is seen as keeping Orcel’s dealmaking focus away from the domestic market.

Commerzbank’s leadership, meanwhile, argues that its turnaround is gaining traction and that a deal would undervalue its prospects. Orlopp has rallied employees around her standalone strategy, allowing her to quickly cut jobs, boost profitability and lift investor payouts.

Shares of the lender have gained around 190 per cent since news of UniCredit’s approach first broke in September 2024, compared with 88 per cent for UniCredit, although the Italian lender still has a superior price-to-book ratio. While Commerzbank’s share rally makes an acquisition more expensive, it has allowed UniCredit to book gains on its stake, underscoring the comfortable position Orcel finds himself in.

In the latest twist to his years-long chase, Orcel last month unveiled a bid for the remainder of Commerzbank’s shares, though with almost no premium. The offer is expected to push UniCredit’s stake beyond 30 per cent, the level that would require it to make an all-out bid under German law, while stopping short of outright control. The idea, instead, is to give Orcel flexibility to push for change and potentially buy more shares in the market.

Speaking at a Morgan Stanley conference in March, Orcel described the bid as a tactical step aimed at breaking what he called an “uncertain”, “abrasive” and ultimately “suboptimal” stalemate that has dragged on for months. Even if no deal emerges, the process would still be a “win-win” by clarifying positions after months of limited progress.

The breakdown of talks with Orlopp suggests that, for now, the disagreements between both sides have only deepened. Commerzbank said on Apr 7 that the hostile nature of the approach made it “difficult to build the mutual trust necessary for a successful transaction”. It plans to announce increased financial targets along with its results for the first quarter results on May 8.

Orcel hit back on Monday with a stinging criticism of Orlopp’s strategy, which he said suffers from “structural weaknesses” that are only “masked by financial tailwinds”. Commerzbank should focus on Germany and Poland and scale back its international operations, he said as he outlined various outcomes for the takeover bid, which is set to start early next month and run for four weeks.

The most likely near-term scenario, according to the executive, is that UniCredit ends up with a stake of around or just above 30 per cent, without control. In that case, it would remain a significant shareholder but take a more proactive and public role in pushing Commerzbank towards what it sees as stronger growth, better risk discipline and improved margins.

The scenario could be complicated if regulators decide that UniCredit already has de-facto control, even if it’s shy of 50 per cent, because typically not all shareholders exercise their voting rights. The lender is in talks with the European Central Bank over that issue, which could result in a more onerous capital treatment for its stake in Commerzbank, sources familiar with the matter have said.

A second scenario would see UniCredit move into a controlling position, with execution led by its German unit HVB, while the most ambitious outcome remains a full combination. In the latter scenario, the combined entity’s net income could hit around 21 billion euros in 2030, UniCredit said on Monday.

Whatever the outcome of UniCredit’s offer, the stand-off raises the prospect of a more confrontational path going forward, with UniCredit’s proposals effectively turning it into an activist investor. Orcel could also use incremental stake building, a later delisting offer and ultimately a statutory merger to gain control, according to merger arbitrage experts.

“Rejection does not make the problem disappear,” said Nicolas Marmurek, co-head of special situations at Square Global Markets. BLOOMBERG