By Valentina Za, Giuseppe Fonte and Andrea Mandala
MILAN (Reuters) -Italy has been examining a potential tie-up between Monte dei Paschi di Siena and Banco BPM in the past few weeks in its search for a buyer for the state-owned Tuscan bank, three people with knowledge of the matter said.
The latest discussions within the Treasury signal that new Prime Minister Giorgia Meloni's government is moving to tackle Italy's biggest banking headache. Monte dei Paschi (MPS), which raised capital last year, needs to merge with a stronger rival to cement its turnaround.
Italy's government has long seen UniCredit (LON:0RLS) and Banco BPM as the best options for a tie-up that would allow the state to cut the 64% stake it acquired in a 2017 bailout of MPS.
With 858 billion euros in assets, against Banco BPM's 190 billion, UniCredit had been singled out by Rome in 2021 as the preferred buyer for MPS, which still has 120 billion euros after a 45% reduction over the past decade.
But the collapse of merger talks in October 2021 over UniCredit CEO Andrea Orcel's request for a 6.3 billion euro capital injection for MPS has made the government diffident towards the former investment banker, despite UniCredit's efforts to mend relations.
In December, Meloni said the government would work to sell MPS with a view to creating several large banking groups in Italy.
An official in Meloni's cabinet office told Reuters that Orcel's U-turn had made the government wary of pursuing further talks. UniCredit declined to comment.
Officials in Rome have focused instead on Banco BPM as a possible alternative, the sources said, adding there had been discussions recently at the economy ministry on the viability of a potential tie-up. A ministry spokesperson declined to comment.
Banco BPM CEO Giuseppe Castagna, who faces pressure from shareholders to reject an MPS deal, has repeatedly said the Tuscan bank is too large for Banco BPM to integrate.
Banco BPM Chairman Massimo Tononi reiterated on Tuesday the bank had no intention of pursuing a merger with MPS.
Tononi and Castagna are up for reappointment in April and is widely expected to be confirmed.
MPS will name a new board in April, with Meloni's government set to decide by March 26 the fate of its CEO Luigi Lovaglio, who in November pulled off the bank's make-or-break 2.5 billion euro share sale.
HURDLES
A Banco BPM and MPS tie-up would pose major hurdles, another three sources said separately.
Banco BPM's market value of 6 billion euros relative to MPS' 3.4 billion would make the state a significant shareholder in the combined entity, at least initially.
One of the three sources said that even if the state froze its voting rights in the merged group to avoid interfering, Banco BPM investors would worry about pressure on the shares given that Italy will eventually have to sell its holding under European Union state aid rules.
Some Banco BPM shareholders would prefer the Treasury to trim its MPS stake via a market placement, like France's AXA did on Monday, in this way buying more time from the EU for a merger.
The Treasury does not rule out taking this route, but not in the near future, a person with knowledge of the matter said.
AXA's sale of the 8% stake that made it MPS' biggest private investor potentially simplifies M&A decisions for the bank, but ending an insurance joint-venture between the two companies remains very costly.
An acquisition of MPS would force Banco BPM to bolster its capital buffers, two of the sources said, in a blow to shareholders whose returns would be diluted after dividend increases contributed to the last year's 30% share price rise.
Banco BPM investors are also concerned about an expansion into regions of the country where economic growth is much weaker compared with the bank's wealthy home base in the north, one of the sources said.
"Geography is Banco's best asset," the person said.
($1 = 0.9426 euros)