European banks. Flirting

The trouble with cross-border mergers

FOR many months, Pierre Richard, boss of Dexia, a Franco-Belgian bank, and Enrico Salza, his counterpart at Italy's Sanpaolo IMI, have been in secret talks about a merger. When the truth leaked out last week, shareholders of both banks were surprised and displeased. On November 22nd Dexia's three largest shareholders forced Mr Richard to suspend talks until a board meeting on November 28th. Meanwhile, members of Sanpaolo's executive committee grilled Mr Salza in Turin, the bank's home city.

A merger may still happen, creating the euro area's sixth-largest bank by market value (but only the 12th-biggest in Europe as a whole - see chart on next page). It would also be a rare example of a cross-border European bank merger, following the recent purchase by Spain's top bank, Santander Central Hispano, of Britain's Abbey. Analysts and investors were sniffy about that deal, and they may be even sniffier about this one. Derek De Vries, an analyst at Merrill Lynch, estimates that merging Dexia and Sanpaolo would yield €317m ($242m) in cost savings: the all-French takeover of Credit Lyonnais by Credit Agricole, an operation of comparable scope, threw up €720m.

Dexia and Sanpaolo are not in great shape. Dexia's main business is lending to municipalities, a dull business with low growth. It is burdened by the acquisition of two Dutch banks, Banque Labouchere in 2000 and Kempen the following year. Sanpaolo is essentially an Italian retail bank. It is weaker than its main rivals, UniCredito and Banca Intesa. Because Sanpaolo is still digesting the merger of a host of sparring regional banks its corporate governance is, in Mr Salza's words, a telenovella (soap opera): until recently the bank had three chief executives.

Why then do Mr Richard and Mr Salza want to merge? Mr Richard does not want his bank to fall prey to BNP Paribas or Societe Generale, two big, cash-rich French banks. Mr Salza too would rather link up with a bank of similar size than be swallowed by a bigger one. Emilio Botn, the chairman of Banco Santander, which owns 8.6% of Sanpaolo, recently hinted at an appetite for the entire bank.

Mr Richard is still hoping to make his binational bank more European. However, economic nationalism remains a powerful obstacle to cross-border mergers. Dexia's three main shareholders, which together control 38% of its shares, want to keep the bank predominantly Belgian. France's Caisse de Depots et Consignations, on the other hand, owner of 7.9% of Dexia and 1.9% of Sanpaolo, is in favour of a merger. Mr Salza is not giving up either. On November 23rd Alfonso Iozzo, Mr Salza's right-hand man, visited Antonio Fazio, the governor of the Bank of Italy, to win the regulator's approval of the proposed deal. In the past Mr Fazio has blocked attempts by foreigners to buy more than 20% of an Italian bank.

A merger of Dexia and Sanpaolo would be unlikely to set off a wave of similar deals, although there may be surprises. Analysts at Societe Generale say Spain's Banco Bilbao Vizcaya Argentaria could buy Italy's Banca Nazionale del Lavoro, a troubled bank currently selling €1.2 billion in new shares. UniCredito could join forces with Sabadell or Popular to enter the Spanish market. But in most countries, including Italy, there are still gains to be had from domestic consolidation. Alessandro Roccati of Fox-Pitt, Kelton, an investment bank, thinks next year could see some deals between Italian banks. Cassa di Risparmio di Firenze, a Tuscan savings bank, is a takeover candidate. Capitalia, a Roman bank, and Banca Antonveneta, from the Veneto region, might join forces.

For Dexia and Sanpaolo, much depends on Mr Richard's powers of persuasion this weekend. Mr Richard and Mr Salza may have to content themselves with a looser alliance - or none at all. If no form of link materialises between the two banks, Mr Richard is unlikely to see out his contract, which expires in 2006. A redrawing of Europe's banking map still looks a long way off.

Articles discusses the trouble with cross-border mergers of European banks.

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