UNICREDIT chief executive officer Andrea Orcel used Barclays and Bank of America to help him quietly build up a stake in Commerzbank, a move that has shaken European finance and triggered a backlash from the German government.
Barclays arranged derivatives linked to Commerzbank for the Italian lender in the weeks before Berlin sold a stake earlier this month, sources familiar with the matter said. Barclays and Bank of America subsequently helped Orcel to effectively expand UniCredit’s holding in Commerzbank to the current level of about 21 per cent, they said asking not to be named discussing the private information.
Representatives for Barclays, Bank of America and UniCredit declined to comment.
Orcel stunned Germany about two weeks ago when he used a government placement to acquire a 4.5 per cent stake in Commerzbank after he had built up an equal holding through open-market transactions that included derivatives. He later relied on financial instruments to boost economic ownership to 21 per cent, the lender announced on Monday (Sep 23).
The German government has since made clear it opposes the approach, with Chancellor Olaf Scholz saying “we do not consider this to be an appropriate course of action.” That’s after Berlin on Friday said it’s suspending Commerzbank share sales until further notice, a decision at least partly stemming from its unhappiness over the nature of Orcel’s approach, Bloomberg has reported.
Orcel has said that the government was aware UniCredit owned 4.5 per cent in Commerzbank before he bought more shares in the government placement. Those comments have added to tensions with Germany, sources familiar with the matter have said.
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When a company uses derivatives to build a stake in another firm, it often works with investment banks that underwrite a so-called “collar” for the buyer. That strategy means the company gives up any gains on its holding beyond a defined cap in exchange for the right to sell shares if they fall below a certain level, effectively ruling out big losses or wins on the investment.
Another complex arrangement known as share swap trade frequently supplements the collar, which prevents the buyer from legally owning additional shares. The buyer can subsequently ask the underwriting banks to deliver the shares, in which case they seek to buy them in the open market over a period that can last weeks to avoid triggering strong price movements.
“Physical settlement” of the derivatives, which would turn UniCredit into the formal owner of the Commerzbank shares and thus the German lender’s biggest investor, “may only occur after the required approvals have been obtained,” UniCredit said on Monday. The Italian lender is applying with the European Central Bank to increase its stake to as much as 29.9 per cent.
Financial instruments gave UniCredit control over 1.92 per cent in Commerzbank voting rights, out of the Italian lender’s total stake of 9.21 per cent, according to a regulatory filing issued after the government sale almost two weeks ago. A large chunk of that came through derivatives known as total return swaps, which transfer economic ownership to the beneficiary but not legal ownership. BLOOMBERG
