Monte dei Paschi's M&A challenge looms as share sale starts



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MPS kicked off 2.5 bln euro capital raising

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Italy has years to reprivatise bank but won't wait long

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MPS had talks with potential suitors before launching share sale

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UniCredit, Banco BPM still seen as preferred M&A options

By Valentina Za and Giuseppe Fonte

MILAN, Oct 18 (Reuters) - Monte dei Paschi di Siena's management and Italian Treasury officials are ready to revive talks with potential buyers once the world's oldest bank completes a 2.5 billion euro ($2.46 billion) share sale next month, sources told Reuters.

Italy has years to cut the state's 64% stake in Monte dei Paschi (MPS) BMPS.MI under a deal with the European Union, but the Treasury is not expected to sit idle for long, two people with knowledge of the matter said.

Rome failed to meet an initial EU deadline when talks to sell MPS to UniCredit CRDI.MI collapsed a year ago.

Despite the abrupt end to the negotiations, the Treasury has "no hard feelings" towards UniCredit CEO Andrea Orcel and would be ready to reopen discussions in the near future, the people said.

Orcel has repeatedly said the window of opportunity for an MPS deal has closed after the Treasury rebuffed his request for 6.3 billion euros in capital to facilitate the transaction.

With a presence in Germany and other central and eastern European countries, UniCredit has a wide ranging array of possible M&A options, but Orcel set a high bar for any deals because of a commitment to return cash to shareholders.

The Treasury had singled out UniCredit as a potential MPS partner because of its robust balance sheet, but had also looked at Banco BPM BAMI.MI because a deal with the smaller rival would create a third large bank to compete with UniCredit and Intesa Sanpaolo ISP.MI .

One of the sources said UniCredit and Banco BPM are still seen in Rome as the best options for MPS.

Italy's fourth-largest listed bank BPER Banca EMII.MI is a less well suited match for MPS even though it benefits from the growth ambitions and decisive leadership of its top shareholder Unipol UNPI.MI , the source added.

Bankers say mid-sized lenders like Banco BPM and BPER need a tie-up in the long run to help to pay for investment in technology and to survive competition from non-banking players.

Also Orcel, a former investment banker, is under pressure to strike a deal for UniCredit, bankers say, after his predecessor failed to clinch an international merger and snubbed growth at home via M&A.

All interested parties declined to comment.

MPS, with an extensive branch network in its home region of Tuscany, is one of the few sizeable acquisition targets in Italian banking. The bank's legal risks, which have been a major hurdle to a sale, are expected to reduce in the future following a favourable court ruling.

DOMESTIC DEAL

Banco BPM has been looking for a domestic merger for a while, but CEO Giuseppe Castagna, who is up for reappointment in April, has recently denied any interest in MPS.

Credit Agricole CAGR.PA has become Banco BPM's biggest shareholder after Castagna failed to agree a merger with BPER and dodged a potential takeover bid by UniCredit.

An MPS tie-up could help dilute Credit Agricole's grip, one of the sources said, in a move that would address concerns in Italy's new centre-right coalition over the French bank's expansion in the country.

MPS did hold talks with potential future partners as it hunted for investors in its new share sale, but was unsuccessful in persuading any rivals to support the fundraising, and talks are set to resume only when the sale is completed, the people said.

Investor commitments cover more than half of the up to 900 million euro portion of MPS's share sale that will not be funded by the state.

Five years after spending 5.4 billion euros to rescue MPS Italy is having to pump another 1.6 billion euros into the bank.

The share offer that launched on Monday will conclude at the start of November, providing MPS with funds to lay off staff and beef up its capital reserves.

MPS said on Friday the European Central Bank had noted the bank's 2024 target of a Tier1 capital of just above 14% significantly lagged the average of other main Italian lenders, potentially posing a hurdle to a future merger.

Clinching a sale could likely pose a valuation issue for any potential buyer, one of the sources said, but added that this was not seen as a problem because the new centre-right government appeared determined to resolve the MPS problem once and for all. ($1 = 1.0163 euros)
Editing by Jane Merriman

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