By Neil Unmack

Andrea Orcel’s Commerzbank XETR:CBK offer has achieved a surprising amount. With a minuscule 4% premium when announced in March, the UniCredit MIL:UCG CEO's move seemed designed to get slightly past a key 30% ownership threshold without paying up. Yet the final results of the tender, due Wednesday, may see UniCredit with 42%, or more, of the €43 billion German bank’s shares, judging from the most recent update.

This leaves Orcel in a powerful position. Despite opposition from Commerz and its 13% government shareholder, UniCredit may be able to sway annual meetings, and have a big say in appointing management. That's because not all investors will vote, meaning even a 42% stake should carry the day.

Yet Orcel still has work to do. To fully control Commerz and push through the €1.1 billion of anticipated cost cuts, the Italian CEO would need to pass another key vote threshold of 75% under German law. To be sure of winning even a high-turnout contest, he probably ought to target a minimum 60% ownership stake. In theory UniCredit could buy shares in the market, but there aren’t many ready sellers: nearly 45% of Commerz is held by either retail accounts, the government or index funds.

One option is for Orcel to bide his time at 42% or wherever he lands, by parachuting in trusted board members and agitating for change. UniCredit reckons Commerz could save €600 million per year simply by running a tighter ship. This strategy would also let Orcel turn his focus back to Italian M&A. Rival Intesa Sanpaolo MILSEDEX:I05808 is pursuing Banca Monte dei Paschi di Siena MIL:BMPS. If that deal happens, former UniCredit target Banco BPM MIL:BAMI would be isolated, allowing Orcel to try again — potentially with Rome's support this time.

Yet this approach also has limits. Commerzbank’s supervisory board, which appoints management, is half full of labour representatives. Of the remaining 10 directors, the German state typically nominates two. In theory, UniCredit could block the state's board appointments, but that would be too aggressive even for Orcel. The upshot is that he may get less say than his large stake deserves.

Another variable is capital. If regulators deem UniCredit in control, which could happen even below 50% ownership, the Italian bank may have to consolidate Commerz's assets but not the German group's equity. That would whack nearly 3 percentage points off the bidder's common equity Tier 1 capital ratio — leaving it at 13%, on Mediobanca analysts' calculations. This could dent UniCredit's share price, especially if investors worry Orcel won't be able to eventually get the merger done, or that it could slash investor payouts.

It all suggests that, sooner or later, Orcel needs to make another move to get closer to full control. This might involve paying more to minority investors. If he waits a year, he could do this without having to offer a bump to those who already tendered. Assume a 20% premium for the shares UniCredit doesn't yet own, and the total outlay including restructuring costs would be about €30 billion. Yet the extra income, plus post-tax savings, would be roughly €4.2 billion by 2030, equivalent to a nice 13% return on investment.

Ultimately Orcel will need to focus on wooing Berlin. The government may be more preoccupied with preserving jobs, lending, and a possible German listing than on extracting a big premium for its stake, potentially reducing the need for a large bump. Getting over the line in Germany may now require Orcel to show a different skill set to the cut and thrust of M&A. Still, at least he's now in a stronger position to contemplate the endgame. That's a win, of sorts.

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CONTEXT NEWS

The extended tender period for UniCredit's all-share Commerzbank offer ended on July 3. The final result will be announced on July 8.