Mega-bids turn the Italian banks industry upside-down

ITALY'S BANKING sector was turned upside down last night after Milan bank UniCredito launched a $16.4bn (pounds 10bn) share swap offer for smaller rival Banca Commerciale Italiana (BCI) and rivals San Paolo-IMI agreed an even bigger share swap deal with Banca di Roma.

The board of UniCredito announced the offer of eight UniCredito shares for every five BCI shares at a price 17 per cent above Friday's market close. The offer is conditional on acceptance by at least 50 per cent of BCI shareholders and the abolition of a clause that limits the voting rights of any BCI shareholder to 5 per cent.

The resulting colossus, which would be named Eurobanca, would have become Italy's biggest bank - and the fifth-largest in Europe in terms of assets, totalling 500 trillion lire (pounds 175bn) - but for the fact that within hours of its announcement, San Paolo-IMI of Turin and Banca di Roma agreed their own merger, which would itself create a bank with assets of 555 trillion lire (pounds 193bn).

If both mergers succeed, Italy will have two banks with the financial strength to compete in the euro zone.

UniCredito, itself the result of a previous merger, said the cost savings that would result from a takeover of BCI would enable it to achieve a return on equity of 23 per cent by 2002. BCI was until last week in merger talks with Banca di Roma.

The main victim of what is being described as an earthquake in Italy's rigid banking system looks likely to be the ageing puppetmaster of Italian finance, Enrico Cuccia, 93. Mr Cuccia, the more-than-honorary president of Mediobanca, held intense consultations on Saturday at the bank's 16th- century Milan palazzo Milan "to decide on a last-ditch defence or an honourable retreat".

The two mergers would mean that 16 per cent of the capital of Mediobanca would be in the hands of Eurobanca and 8 per cent in San Paolo-Banca di Roma - nearly a quarter of its wealth would no longer be in friendly hands. This would at best undermine Mediobanca's autonomy, and at worst leave it vulnerable to the same companies and banks it has in the past influenced.

The manoeuvres would also bring a greater foreign presence to the sector; Deutsche Bank, Commerzbank and Paribas in UniCredito-BCI, and ABN Amro and Banco di Santander in the San Paolo union.

Overseas institutions are unlikely to play the game Mr Cuccia's way. For decades, this reclusive and brilliant man has had the last say in almost every major industrial or financial operation on Italian soil.

Mr Cuccia's strategy when he founded Mediobanca was simple; he created alliances with the major families of Italian capitalism, from the Agnellis to the Pirellis, and helped them maintain their power, preferably without calling on share issues or bank loans.

He did this through a subtle web of cross-shareholdings between companies and banks that were members of the exclusive Mediobanca club. At times of crisis all could be counted on to vote as a block, and if one was in difficulty the others would help out. Critics say Mediobanca thwarted growth in the entire financial sector.

Analysts say the introduction of the euro, deregulation and the privatisation of many state controlled banks mean a more competitive environment is inevitable, but Mediobanca has failed to adapt its strategy. Mr Cuccia's close relationship with Lazard Freres and the Agnelli family - two key planets in the Mediobanca constellation - have become strained. Indeed car maker Fiat, controlled by the Agnelli family, was instrumental in setting up the San Paolo-Banca di Roma deal.