This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 ROME 000943 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
STATE PLEASE PASS TO CEA 
TREAS FOR HULL 
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
PARIS ALSO FOR USOECD 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN ELAB PGOV IT KPRP ITALIAN POLITICS
SUBJECT: ITALY:  TAKEOVERS SHAKE-UP BANKING SECTOR 
 
Ref: A. 06 ROME 449 
     ¶B. 04 ROME 4149 
 
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SUMMARY 
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¶1.  (SBU) The December 2005 resignation of Bank of 
Italy (BOI) Governor Antonio Fazio, and the 
appointment of reformist Mario Draghi, has raised 
expectations that a wave of bank mergers will sweep 
Italy in 2006.  French bank BNP-Paribas made the 
first move, taking over Banca Nazionale del Lavoro 
(BNL), Italy's sixth largest bank.  BOI approved the 
tender offer March 20, and BNP is expected to take 
full control of BNL by summer 2006. 
¶2.  (SBU) In early March, Governor Draghi stated a 
clear preference for increased competition in 
Italian credit and banking markets, to "innovate, 
reduce costs, and improve services."  Weeks before 
national elections, Draghi's comment has let Italian 
banks know they will no longer benefit, to the 
extent previously, from Central Bank protection from 
foreign takeovers.  END SUMMARY. 
 
French Take-Over Opens the Door. 
-------------------------------- 
 
¶3.  (U) French bank BNP Paribas made a surprise 
announcement February 3 that it would buy 48 percent 
of Banca Nazionale del Lavoro (BNL), Italy's sixth 
largest bank, from the Italian insurance company 
UNIPOL, and other, smaller shareholders.  In 
anticipation of a merger offer, BNL had cleaned up 
its balance sheet by selling non-performing loans to 
Morgan Stanley in December; disposed of assets in 
Argentina; and restructured the bank's Iraqi debt. 
Unipol and its affiliates were eager to sell their 
huge stake in BNL, following the rejection of their 
earlier offer to buy the bank. 
 
¶4.  (U) BNP plans another offer to acquire the 
remaining BNL assets.  If the deal goes through, the 
BNL acquisition by BNP will be worth nine billion 
euro, the third-largest cross-border merger in the 
European banking sector.  BNP received approval from 
BOI, March 20, to complete the acquisition, and is 
awaiting approval from Consob, the financial market 
regulator, and Italy's antitrust agency. 
 
The First of More Foreign Bank Takeovers 
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¶5.  (U) During former BOI President Fazio's tenure, 
foreign banks required BOI authorization to increase 
their ownership in Italian banks, if the tender 
exceeded fifteen- percent of equity.  The fall of 
Fazio and passage of the financial market reform 
bill (ref A) removed the fifteen percent foreign 
ownership cap for banks, and drastically reduced the 
unilateral power of the BOI governor. 
 
¶6.  (U) Foreign banks are quickly increasing their 
stakes in Italian banks.  Following the acquisitions 
of BNL by BNP Paribas, and Banca Antonveneta by ABN 
Amro, foreign banks now control over nineteen 
percent of Italian banks' equity, or some 37 billion 
euros.  French banks own almost half of the foreign- 
controlled assets, with stakes not only in BNL, but 
also in Carifirenze, Mediobanca, Carige, SanPaolo- 
IMI, Unicredit and Popolare di Milano. 
 
Big Mergers on the Horizon? 
--------------------------- 
 
¶7.  (U) Following the BNP/BNL merger, the Italian 
press is bubbling with rumors that Citigroup is 
eyeing a possible takeover of Unicredit, Italy's 
largest bank, while Unicredit has set its sights on 
German and Polish banks.  Last year Unicredit merged 
with Hvb, Germany's second largest banking group, 
which at the time was the largest cross-border bank 
merger deal in Europe, and created a bank with 780 
billion euro in assets. 
¶8.  (U) Possible domestic merger rumors include 
Banca Intesa, Italy's second largest bank, and Monte 
dei Paschi di Siena (MPS), Italy's fifth largest 
bank.  Banca Intesa has confirmed it is considering 
acquisitions to boost growth, but dismissed the 
rumors of the ten billion euro merger with MPS. 
 
¶9.  (SBU) Banca Intesa is also rumored to be eyeing 
a hostile take-over of Capitalia, and this news has 
caused both banks' stock to rise sharply.  In 
defense, Capitalia purchased two percent of Banca 
Intesa shares to force Banca Intesa, under Italy's 
complicated and anti-competitive cross-shareholding 
laws, to either make a cash offer for a 60 percent 
stake, or negotiate a friendly takeover with 
Capitalia. 
 
¶10.  (SBU) There are rumors of another big project: 
the merger between Banca Intesa, Mediobanca and 
Generali, Italy's largest insurance company, to 
create one of Europe's largest financial services 
conglomerates.  If this deal went through, French 
companies would further increase their already 
substantial shareholdings in Italy's banking and 
insurance sectors.  After the French scotched Enel's 
takeover attempt of Suez, however, it is doubtful 
Italy's political and financial community would 
approve this project, especially as it falls on the 
heels of the BNP/BNL deal. 
 
¶11.  (U) In addition, any takeover move by Intesa 
requires the approval of French-giant Credit 
Agricole, an important shareholder in Intesa. 
Credit Agricole's President, Rene Carron, said March 
6 the bank will mobilize "considerable firepower" to 
protect Banca Intesa.  Credit Agricole's influential 
role in Intesa's shareholder pact expires April 
¶2008. 
 
Stumbling Blocks 
---------------- 
 
¶12.  (U) The Poison Pill.  Italy has also played its 
part in Europe's recent protectionist response to 
cross-border mergers.  Reacting to France's proposal 
to allow "poison pill" defenses to hostile takeover 
bids, Finance Minister Tremonti said February 22 
that while Italy's corporate merger law is "among 
the most open," poison pill defenses should be 
allowed when a firm "under attack has more limited 
defenses than the attacker."  He did not specify 
what Italian entity might use a poison pill defense. 
However, he defended using this veto power by saying 
that Italy was among the most "market-oriented" EU 
countries, disliked protectionism, but could not 
ignore France's firm line on hostile takeover bids. 
 
¶13.  (U) Tremonti's statement received bipartisan 
support from Draghi; Prime Minister Berlusconi; 
Confindustria President Montezemolo; Democratici di 
Sinistra (DS), Italy's largest opposition party; and 
economic expert Pierluigi Bersani (former Minister 
of Productive Activities). 
 
¶14.  (SBU) Comment:  While Tremonti supports both 
Italian bank consolidation as well as tougher 
Italian takeover laws to counter GOF protectionist 
efforts against foreign takeovers of French firms, 
his statement also reflects the current anxiety over 
transborder mergers sweeping across Europe.  End 
Comment. 
 
¶15.  (U) Shareholder Pacts.  Another stumbling block 
to mergers may be "shareholder pacts," designed to 
protect Italian banks and companies listed on Milan 
stock market from hostile takeovers.  These pacts 
could also slow down future mergers. 
 
Comment 
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¶16.  (SBU) Italian banks have benefited from the 
country's regional banking markets, with lending 
margins among the highest in Europe.  However, the 
banking sector lacks the sophistication found in 
other European countries; and while bank revenue per 
client in Italy is on par with other EU countries, 
Italian banks sell far fewer products to each 
client.  This factor suggests room to grow.  In 
addition, Italy's high saving rate (eighteen percent 
of GDP in 2005), and the relatively undeveloped 
market of consumer credit, consumer loans, life 
insurance, and mortgages, makes continued shopping 
for Italian banks a likely prospect. 
 
¶17.  (SBU) However, the radical changes to Italy's 
financial sector through further consolidations, 
mergers, and acquisitions could causes unease 
domestically.  In fact, some earlier opponents of 
Fazio's protectionist approach now seem to have 
taken up his mantle.  They know Italian banks have 
historically helped to stabilize Italy's economy, 
through political deals like that for the Fiat 
convertible loan and the Alitalia bridge loan, for 
example.  Italian leaders worry that foreign banks 
would be less inclined than Italian banks, to bail 
them out of loss-making ventures.  End Comment. 
 
Spogli