Banca Monte dei Paschi di Siena’s audacious €9bn purchase of Banca Antonveneta last November required some serious work to raise the necessary financing. Edward Russell-Walling reports on how the group’s efforts ended up breaking the Italian record for capital raised.

Of all this year’s banking sector rights issues, only one stands out as being done for the right reasons. Italy’s Banca Monte dei Paschi di Siena raised nearly €5bn in equity from existing shareholders, not to repair its balance sheet, but to fund a strategically important acquisition. That may account for its unqualified success.

At the start of last November, in the wake of the consortium takeover of ABN AMRO, Banco Santander sold Banca Antonveneta – part of the spoils – to Monte dei Paschi (MPS), even before the ABN AMRO deal had closed. MPS snatched its prize from under the noses of other interested parties by paying the fullest of prices. The €9bn consideration was almost equal to the Siennese bank’s entire market ­capitalisation.

The bank promptly started two separate processes. It ordered work to begin on a new business plan for the enlarged group. And it began to work out, internally, how to finance the deal. By the second half of November it had drawn up a plan. It would raise up to €5bn via a rights issue, €1bn in convertible Tier 1 capital, €2bn in subordinated Tier 2 capital and up to €2bn in bridge finance to be repaid through asset disposals.

Mandate of six

“In the last week of November, once this internal process was complete, we invited 16 financial institutions worldwide to make proposals. We asked each one to cover every single leg of the financial package,” says Marco Morelli, a former JPMorgan investment banker who is now MPS’s deputy CEO, responsible for the group’s corporate, international and finance businesses.

A shortlist was quickly drawn up, consisting of 12 investment banks, asked to present by December 17, complete with binding underwriting agreements and acceptance of the fee str­­u­c­ture and MPS’s legal documentation.

The following day, MPS mandated six banks. MPS itself was overall global co-ordinator, advised by Merrill Lynch and Mediobanca. Citibank (led by Luca Benzoni, head of FIG for Italy), ­Goldman Sachs (led by Massimo Della Ragione, co-head of investment banking for Italy) and Merrill Lynch (led by Filippo Foco, co-head of FIG for Italy) were named global co-ordinators for the whole fundraising package. Citi, ­Goldman and Merrill, along with Mediobanca and Credit Suisse, would be bookrunners for the rights issue. That trio and Credit Suisse would be bookrunners on the subordinated loan issue. JPMorgan was lead bookrunner on the Tier 1 capital issue, with ­Goldman Sachs and Mediobanca as bookrunners. All six banks underwrote a portion of the bridge financing at an extremely aggressive spread of Euribor plus 10 basis points.

“The three global co-ordinators worked with us on an equal basis on every part of the deal,” Mr Morelli emphasises. “Each contributed at full steam but none had an outright leadership role.”

Regulatory approval for the acquisition was vital to everyone at this stage, not least to the investment banks, which were on the hook for a sizeable portion of the €9bn whether the deal was approved or not. While they waited for the Bank of Italy to pronounce, work on the capital raising exercises went ahead at full speed. Once the green light was given, time was of the essence, for the rights issue in particular.

Speed was a factor because the team knew that MPS wasn’t going to be the only European bank tapping its shareholders. “We didn’t know what other bank rights issues would be coming up,” observes Goldman Sachs’ Mr Della Ragione, a former colleague of Mr Morelli’s at JPMorgan. “But we knew they would be coming up, while investor interest in financing the banking industry was becoming more selective and demanding.”

MPS unveiled its 2008 to 2011 business plan during the second week of March and regulatory approval came through a week later. In the first week of April, a €1bn perpetual convertible bond issue was launched and placed within 48 hours. A week later, after sounding out the market, it was deemed simplest and safest to place the entire €2bn upper Tier 2 issue via MPS’s retail network. And about a week after that, final conditions for the rights offering were announced.

Low discount

This sought to raise a little less than €5bn, up to €2.3bn of it underwritten by the bookrunners. The one-for-one offer consisted largely of ordinary shares, although with smaller tranches of preference and so-called saving shares. The subscription price was €1.50. That represented a discount of 32% to the theoretical ex-rights price of the shares.

That price included rights to the latest MPS dividend (due before completion of the rights issue) so the discount to the ex-dividend price was actually a lean 26%, considerably lower than the discounts in other banks’ rights offers this year. The whole exercise was powerfully supported by the fact that Fondazione Monte dei Paschi di Siena, which owns 49% of the banking group’s voting stock, undertook to exercise all its pre-emptive rights.

Prevailing market conditions, however, did not support the exercise. Equity markets were bearish, the banking sector was deeply out of favour and the banks that had underwritten the issue had problems of their own. The performance of MPS’s share price in the market would speak volumes as to how investors viewed the offer.

“We positioned MPS as a bank raising capital to do a strategic acquisition, which was different from all the other rights issues,” says Mr Della Ragione. “But the timing was crucial, and the pressure was pretty high.”

In addition, success depended on convincing investors of the sense of the Antonveneta acquisition, and that MPS was going to make the most of it. MPS’s case was that the acquisition would allow the group to achieve critical mass and become a third force in Italian banking. It had the potential for strong value creation and, at the same time, MPS management had a good track record in achieving its stated targets.

One bank, one territory

Antonveneta would be integrated into MPS, the principal bank, along with existing subsidiaries Banca Toscana and Banca Agricola Mantovana, and their branches reorganised along the lines of ‘one bank for one territory’. At the same time, there would be efficiency improvements from the integration of back office, information technology and credit functions. While the acquisition had been expensive, it would unlock the group’s strategic future, as well as providing upside from better management of Antonveneta itself.

“These were important messages in the roadshow, which lasted three weeks,” says Mr Morelli. “We had tight financing and an aggressive business plan, which were key factors in the success of the whole exercise.”

It helped that MPS was very much a commercial bank, and becoming more so as it disposed of or found partners for other assets, such as its fund management arm and a real estate business.

Shareholders believed the story, and the share price, unlike that of more unfortunate banks, held its own – at least relative to a declining market in general. By the time the offer closed on May 19, subscriptions had been received for 99.5% of the ordinary shares and all of the preference shares (unsurprisingly, since the Fondazione owned all the existing prefs). And, 98.6% of the saving shares were taken up, mostly by the Fondazione. The rump was auctioned off, as provided for by Italian law, on the Borsa Italiana shortly thereafter.

First-time success

Satisfaction at pulling it off was felt nowhere more keenly than at MPS itself, which had been central to the success of the entire project. “The team at MPS did a terrific job,” says Mr Morelli. “For a number of them this was the first time they had to deal with financial institutions, lawyers, public relations and the board of directors in such a complex way.”

Overall, the group raised the largest amount of capital ever achieved in Italy for a financial institution and Mr Morelli can still hardly believe it.

“If someone had asked whether MPS was in a position to complete such an exercise in such a market in only five months,” he says, “99% of people, including myself, would have answered in the negative.”

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