Fool me once – BMPS faces difficult task going back to shareholders

Data Insight ECM Pulse 1 September

Fool me once – BMPS faces difficult task going back to shareholders

Banca Monte dei Paschi di Siena [BIT:BMPS] is once again on the hunt for equity capital, but a host of obstacles could hinder the most notable rights issue of 2H22.

Almost all of the equity raised by BMPS over the course of a decade has been wiped off in poor trading. The bank and its underwriters now face the monumental task of getting its shareholders to put their hands in their pockets again.

BMPS has raised equity four times since May 2008. While that first raise was for M&A, the acquisition of Antonveneta, the other three were to steady the bank in the wake of the global financial crisis and subsequent recession which battered continental Europe, particularly Italian loan books.

 “BMPS will have done five capital raises in around 10 years,” said an adviser on the deal. “Investors are likely to ask, ‘what guarantees are there that in two years we won’t be here all over again?’".

The bank will claim that, unlike previous raises, the upcoming operation is more akin to an IPO, with a revived equity story propped by its new industrial plan, a source close to the deal said. Following the initial announcement in June, the rights issue has been pitched to potential local and international investors in a series of informal meetings across Italy and London helmed by new CEO Luigi Lovaglio, who joined early this year from Credito Valtellinese and has long-term ambitions to streamline the operations of the storied financial institution, the source said.

Including the 2008 raise, Monte has pumped around EUR 15bn of equity into its capital structure. Yet, as it prepares for another EUR 2.5bn capital injection, its market capitalisation stands at just over EUR 400m.

“BMPS is going to be a real fight,” said an Italian ECM banker. “You can do this sort of deal once, or maybe even twice, but after that it becomes hard to sell.”

BMPS is fortunate in that it has the Italian state as a major shareholder, and the Ministry of Finance is fully committed to the deal. However, EU state aid rules remain a key issue at play.

Italy recently persuaded European Commission (EC) – subject to revised commitments - to give it more time to exit its 64.23% holding in BMPS following a precautionary rescue in 2017, but the new cash call has not been formally cleared of regulatory risks.

“In general, it is always for member states to assess whether a measure constitutes state aid that needs to be notified to the Commission for assessment,” an EC spokesperson said, adding that the “revised commitments do not concern BMPS’s plans to raise capital”.

Italy cannot increase its existing shareholding in Monte through the cap hike for the deal to be free of state aid. This means the underwriting banks must get the rest of the register to pump in around EUR 894m or face holding the stock.

Mediobanca, BofA, Credit Suisse and Citi first signed pre-underwriting agreements with BMPS in June, according to local reports. In August the bank announced that Banco Santander, Barclays, Société Générale and Stifel, were joint bookrunners.

This morning, this news service reported that proxy advisors have given indications for a favourable vote on the rights issue, officially paving the way for the operation next month.

BMPS will hold an extraordinary general meeting on September 15 and while the state’s majority means the deal is not under threat, it could give an early indication on the transaction’s popularity.

A difficult precedent

On top of its own baggage, BMPS must also ride over market worries after the tepid reaction to Italy’s other large 2022 rights issue, a EUR 2bn raise by Italian oil-drill manufacturer Saipem [BIT:SPM].

Lower than expected investor participation, particularly among retail, left underwriting banks holding a EUR 592.3m stake in the company. They are likely facing a loss on the position, given shares have traded well below the EUR 1.01 subscription price.

A banker on the Saipem deal said he does not envy those working on BMPS, given his experience of a recent Italian rights issue with a large retail shareholder base.

In Saipem’s case, the syndicate had a positive equity story, the turnaround of the company under new management and a positive environment for European energy-linked stocks given the need to diversify from Russian oil and gas. It still was badly undersubscribed, as reported by this news service.

BMPS could be an even harder sell, the banker argued.

A second adviser for BMPS is more bullish. The bank is an important strategic institution in Italy and therefore should get support from existing and new shareholders, he noted.

But he admits that Saipem had set “a difficult precedent” after banks were left holding stock, despite having a stronger equity story and rationale.

Italy also faces a snap general election on September 25 and a right-wing bloc led by the populist-right Brothers of Italy Party leads the polls.

BMPS’ rights issue – a highly political operation anyway (given the state’s ownership) – is even more challenging for some investors given Italy’s political turbulence, the first adviser on the deal and the banker on Saipem agreed.

However, not even radical candidates are expected to stand in the way of the operation due to the public investment attached to it, the first source countered. In addition, the interim government in place in coming months should ensure the necessary stability for the transaction, he added.

New investors might be needed to bump up subscription levels and offset any potential low take-up from retail investors and institutional shareholders put off by the deal, the second adviser and the banker on Saipem agreed.

In July, Il Corriere della Sera reported that Italian financial services company Anima Holdings would be prepared to take a stake in the rights issue in exchange for greater cooperation between the companies. The report added that Anima could, alongside other anchor investors including Algebris and insurance group Axa [EPA:CS], subscribe for EUR 500m of the rights issue, significantly de-risking the operation.

CEO Luigi Lovaglio could also be an asset to the deal. Investors who bought into the successful acquisition of Credito Valtellinese by Credit Agricole and his track record may have his back again, the source close added.

But as with all things BMPS, no deal is ever easy.

BMPS declined to comment.

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