Intesa’s Interest in Generali Is ‘Strategically Questionable’: Opinion

Intesa Sanpaolo SpA is one of the few Italian banks that could accurately claim to be strong, profitable and shareholder-friendly.

Generali’s Market Value: €23 billion

It’s curious, therefore, that CEO Carlo Messina seems intent on jeopardizing that record with a strategically questionable and poorly-communicated tilt at Assicurazioni Generali SpA, the country’s largest insurer. Even if a bid fails to materialize, he will have to work hard to regain investors’ trust.

Since newspaper reports first raised the possibility of a pounce on Generali in January, the Intesa CEO has tried, several times, to make clear that the bank will always prioritize dividend pay-outs and its top-flight capital ratio over any merger opportunity involving Generali. But those promises ring hollow.

According to an analysis by Barclays, even if Intesa were to buy Generali for no premium (which looks unlikely) and then sell off large chunks of the business outside Italy (which looks unpopular) the bank’s core capital ratio would slip to a net 12.1 percent from 12.9 percent.

Let’s not forget that Intesa is already struggling to meet its own dividend promises without selling assets. How would buying an insurer and eroding its capital base make it any easier?

Messina’s own red lines, in other words, would seem to make this deal a non-starter. But his tone is spooking, not reassuring, shareholders.

On an earnings call to present Intesa’s results, the CEO suggested the Generali plan actually made sense from a balance-sheet perspective and was now being tested for strategic logic.

The latter looks as much a stretch as the former: the bancassurance model has failed shareholders, regulators and managers repeatedly before. As former ING CEO Jan Hommen memorably put it in an interview in the Financial Times in 2013, crunching two businesses together that operate on completely different life cycles is a recipe for conflict.

Politics, too, is rearing its ugly head.

Messina told an audience of peers last month that Intesa is “a company that speaks Italian, not French,” a quip seen as an attack on rival Unicredit SpA’s French CEO, Jean-Pierre Mustier, who had earlier defended Generali’s independence. If Messina is trying to drum up political support for a merger, it doesn’t bode well for price prudence or investor interests.

The stock-market reaction says a lot. Since speculation about a bid for Generali broke on Jan. 22, Intesa’s share price has fallen by 11 percent. Generali’s has climbed 3 percent. In terms of market value, the gap is even starker: Intesa’s has fallen by 4.2 billion euros ($4.5 billion) to 35.9 billion euros, while Generali’s has risen by about 650 million euros to 22.9 billion euros.

Investors either see a chance of no deal at all, or a bad deal that creates little value — Generali’s management could probably deliver 650 million euros of additional shareholder value independently.

As my Gadfly colleague Chris Hughes recently wrote, there are many ways Generali can defend itself: It can work harder to deliver more savings and can (accurately) point to the failure of past mergers between banks and insurers. [Editor’s note: Bloomberg Gadfly is the news agency’s commentary and opinion section.]

But what is Intesa’s defense against itself? Whether a bid materializes or not, Intesa’s managers will have to work hard to regain investors’ trust that they can stick to their strategy and resist expensive empire-building.

It may seem harsh to place the blame entirely at the feet of Messina. This is Italy, where politics and business routinely mix. Perhaps Messina himself is under pressure to make a deal happen. Generali’s relatively new management team and top shareholder Mediobanca SpA’s openness to reducing its stake may have made the insurer look an especially tempting target.

But bankers and investors say Messina hasn’t done enough to secure support from stakeholders. Nor is there a clear enough response to the headwinds facing Intesa: falling fee income and rising loan losses will test lofty dividend promises.

Even if common sense prevails and a full bid for a linchpin of Italian capitalism is scrubbed, the hard work for Messina may be only just beginning.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.