Italy Seeks Options for Paschi as UniCredit Deal in Doubt

Italy is seeking alternative options to sell Banca Monte dei Paschi di Siena SpA as a deal with UniCredit SpA appears increasingly unlikely under that bank’s new chief executive officer.

Andrea Orcel, who took over as UniCredit CEO in April, has set conditions for a purchase that the Treasury sees as too costly, according to people familiar with the matter. The government, which bailed out Monte Paschi in 2017 and has to divest its holding this year under European Union rules, is now weighing options including breaking up the bank and selling it in pieces, and possibly asking for an extension of the deadline, the people said, requesting anonymity because the process isn’t public.

Representatives for the Treasury, Monte Paschi and UniCredit declined to comment.

Italy is running out of time after months of talks over a potential deal were frozen at the beginning of the year amid a change of government and the leadership transition at UniCredit. Monte Paschi faces a 2.5 billion-euro ($3 billion) capital shortfall and has warned it may need to postpone fundraising plans. The European Central Bank has written to executives asking for details on how they plan to plug the gap.

Shares of Monte Paschi erased earlier gains on the news, dropping as much as 0.3% in Milan trading. The stock is still up about 8% so far this year.

Orcel has highlighted in talks with the Treasury that taking over Monte Paschi wasn’t a priority for him as seeks to move UniCredit away from restructuring to delivering sustainable returns, according to the people. Stress test results due in July will likely highlight Monte Paschi as one of the region’s weaker lenders.

Orcel’s predecessor Jean Pierre Mustier had already asked that a deal shouldn’t affect UniCredit’s capital strength, and that it be shielded from any legal risks tied to Monte Paschi. Orcel has added more conditions, including that Monte Paschi will dissolve all bancassurance and consumer credit agreements in place with other firms at no cost to UniCredit, Il Messaggero reported earlier Wednesday.

Such a package would be too expensive and time-consuming to implement for the government, the people said. For the Treasury, a more viable option might be to break up Monte Paschi’s operations along geographic lines to facilitate deals with smaller lenders. Ministry staff are also exploring options to raise fresh funds to keep the bank afloat until a solution is found, the people said.

A last resort would be to seek an extension of the EU’s 2021 deadline to sell the bank. While Prime Minister Mario Draghi’s government isn’t in favor of such a move, it might end up not having another option, the people said.

Undermined by souring loans and derivatives deals that backfired, Monte Paschi was nationalized through a 5.4 billion-euro state bailout. Since then, it has struggled to deliver consistent profits.

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