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Breaking up UniCredit could mean €3bn for shareholders while it offsets Italian exposure

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Spinoff : A UniCredit branch in Rome

Spinoff : A UniCredit branch in Rome

Spinoff : A UniCredit branch in Rome

Breaking up the pan-European commercial banking group UniCredit could hand its shareholders a €3bn reward. Chief Executive Jean Pierre Mustier is accelerating plans to separate the €16bn bank's Italian assets from its Germany-centred foreign business, Reuters reports. A spin-off could boost the stock by up to 20pc. In a deal with Commerzbank or BNP Paribas, the returns could be even higher.

Even after a deep clean since Mr Mustier became CEO in 2016, UniCredit's stock is languishing. At 28pc of its tangible book value, Italy's second-largest bank is valued only a little more highly than weaker, smaller domestic rivals like Banco BPM and Banca Monte dei Paschi di Siena. Investors unfairly penalise UniCredit for its Milan base even though it made some 60pc of revenue abroad last year. Its Italian exposure also deters foreign suitors and pushes up funding costs.

Turning back the clock on UniCredit's 2005 acquisition of Munich-based HVB, and creating two listed companies, would allow investors to value each part more clearly.

Without its European business, the Italian rump would trade more cheaply. But that would be more than offset by higher valuations for the rest - which would likely include operations in faster-growing eastern European countries, as well as investment banking in Germany and Austria - especially if it lists in Frankfurt.

Assume the Italian business trades at about 25pc of tangible book value, just above smaller domestic peers. With a likely book value of around €20bn based on its current share of group revenue and Refinitiv estimates, it would be worth perhaps €5bn.

The foreign operations' more than 4pc return on capital in the first half of 2020 would suggest a market capitalisation of at least 40pc of their estimated €34bn book value. That's €14bn.

Shareholders would be left with two banks worth a combined €19bn.

A spin-off could also offer Mr Mustier a stepping stone for deal-making. Merging the new HVB with, say, Commerzbank, would create scale, and cost savings. Selling to a larger foreign player such as BNP Paribas would command a control premium, perhaps 30pc.

It would be costly and complex. Mr Mustier would also need to get buy-in from his future chairman, former finance minister Pier Carlo Padoan - named on Tuesday to the job - and persuade the Italian government. Yet the reward for investors is clear.

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