© Reuters. FILE PHOTO: Headquarters of Banca Monte dei Paschi in Siena, Italy, October 27, 2017. REUTERS / Stefano Rellandini / File Photo
By Pamela Barbaglia and Valentina Za
LONDON (Reuters) – Italy's government and UniCredit are preparing to break off negotiations on the sale of ailing Monte dei Paschi (MPS) after failed efforts to reach an agreement on a costly recapitalization plan, two sources told Reuters .
The decision would complicate the efforts of Prime Minister Mario Draghi's government to meet a deadline agreed with the European Union authorities in mid-2022 to re-privatize Bank Romes, which was rescued in 2017.
Italy has long seen a merger with a stronger competitor as the best solution for the Tuscan bank, which plans to raise 2.5 billion euros ($ 2.9 billion) in capital next year.
The sources said, however, that the terms of a possible sale that UniCredit and Italy's Treasury Department agreed upon entering exclusive negotiations on July 29 made the merger plan too costly as an alternative to stand-alone recapitalization.
A recapitalization package worth more than 7 billion euros seemed "too punitive" to Italian taxpayers after they spent 5.4 billion euros to bail out the bank four years ago, according to one of the sources.
Rome must now get approval from Brussels to pump more money into Monte dei Paschi without a plan on hand to cut the 64% stake held by the state. She also has to negotiate a new exit agreement with the European authorities.
UniCredit, Italy's No. 2 lender, and the Treasury Department declined to comment.
UniCredit had started discussing a possible purchase of MPS under former CEO Jean Pierre Mustier. But his successor, Andrea Orcel, who took over in April, raised the bar and targeted a deal for only the most profitable parts of the bank.
UniCredit had announced that it would only have MPS branches in more affluent northern and central regions and would not take out sour or risky loans or risk due to mismanagement.
After completing the due diligence analysis in September, UniCredit submitted detailed claims based on the July terms to the Treasury Department at the beginning of the month. It aimed to make a decision ahead of a board meeting on October 27th to approve the quarterly results.
Sources said the parties found it impossible to fill the gap in their assessments of MPS's recapitalization needs, a difference one person put at 2.5 billion euros.
To further complicate matters, disagreements broke out again this week over assets for sale, with the government pushing to include MPS's capital services arm and its leasing and factoring unit, two sources said.
In addition, negotiators haggled over the way UniCredit calculated their fair value adjustments on MPS liabilities, which, along with the size and cost of downsizing Italy had to provide, became another major stumbling block, the said first source.
“No deal is currently possible under the terms of UniCredit. But the same framework UniCredit was offered could be applied to a standalone plan, ”the source said.
Rome has already explored the potential benefits of a standalone strategy in which the Treasury Department would implement parts of the measures being offered to UniCredit, including a multi-billion euro capital increase, this source said.
If the stand-alone plan is implemented, MPS will also get rid of its remaining acidified loans – which would go to the state emergency loan manager AMCO – and any exceptional legal risks that would be handled and guaranteed by the state.
According to the plan prepared by treasury consultants Bank of America (NYSE 🙂 and Orrick for the sale to UniCredit, MPS's legal risks from mismanagement would be transferred to the state-owned Fintecna, as a confidential document from Reuters had shown.
($ 1 = 0.8593 euros)