By Alessandro Boratti, CFA, Financial Institutions

From a credit perspective, the combined entity would benefit from a highly diversified revenue base across all major financial segments: banking, wealth management, and insurance. MPS would also bring EUR 2.9bn of deferred tax assets onto its balance sheet, to be released over six years and delivering an after-tax P&L benefit of EUR 500m.

Management estimates annual synergies of around EUR 700m driven by increased revenues through cross-selling and market penetration, lower costs through fixed cost optimisation and lower financing costs.

However, achieving these synergies could be challenging due to significant differences in the two entities. MPS, a commercial bank with a focus on mass-market retail and SME customers, operates a distinct business model to Mediobanca, which is centred around wealth management focused on the high-net worth segment, investment banking, and consumer finance. The corporate cultures of the two organisations are also markedly different, as Mediobanca has traditionally operated as a merchant bank and has retained an investment banking orientation.

While MPS has a larger asset base than the target (EUR 122bn vs EUR 98bn as of September 2024), its market capitalisation is 40% smaller. Under the share-exchange proposal (23 newly issued ordinary shares for every 10 Mediobanca shares tendered), MPS shareholders would only control 40% of the combined entity after the transaction.

Therefore, the support of Mediobanca's two largest shareholders, Delfin and the Caltagirone Group which together hold 27.7% of the bank's equity and 14.8% of MPS, is key to the deal. If the transaction goes through, their stake in the merged entity would rise to around 22%.

The main driver of the transaction is the creation of a strong third player in the Italian banking sector behind the two market leaders, Intesa (A/Stable) and UniCredit (A/Stable). This is something the Italian government has long advocated. The combined entity would hold a significant stake in Assicurazioni Generali and could further strengthen its market position through future acquisitions.

Notably, MPS has no plans for full integration at this stage. The acquisition is structured as a "plug-in" deal, maintaining both brands and preserving operational independence for the time being.

We remain supportive of in-market consolidation as it offers greater value creation potential than cross-border mergers. Today's announcement effectively removes two (theoretical) competitors from UniCredit’s pursuit of Banco BPM, although we do expect UniCredit to sweeten its offer to gain the support of the majority of Banco BPM's shareholders.