Italy's UniCredit to buy Capitalia for $29 billion

ROME, (Reuters) -- UniCredit has agreed to buy smaller rival Capitalia for more than $29 billion in shares to create Europe's second biggest bank, with branches stretching from Sicily to Eastern Europe.

The boards of both banks approved the takeover on Sunday, the banks said in a joint statement issued hours after they won the backing of a key group of investors controlling about 31 percent of Capitalia.

The merger cements UniCredit's position as Italy's largest bank by market value and ends years of speculation as to who would carry off Rome-based Capitalia in a rapidly consolidating industry.

UniCredit will pay 1.12 of its shares for each Capitalia share, valuing Capitalia at 8.41 euros a share or 21.83 billion euros ($29.47 billion), according to UniCredit's last share price before their trade was halted on Friday.

The takeover enables the new UniCredit, with a combined market capitalization of more than $135 billion, to expand on its home turf in a challenge to its larger domestic rival Intesa Sanpaolo. It also keeps Capitalia, Italy's third-largest bank, out of the hands of prospective foreign buyers.

"The transaction is a unique opportunity to consolidate two leading banking groups in a key core market," read the statement.

Capitalia Chief Executive Matteo Arpe, who spearheaded a turnaround at the bank, but locked horns over strategy with influential Chairman Cesare Geronzi, has resigned.

Geronzi will become vice chairman of UniCredit, while UniCredit's Chief Executive Alessandro Profumo and Chairman Dieter Rampl will retain their titles.

Geronzi is appealing against a conviction for corporate wrongdoing in a case concerning the bankruptcy of an Italian real estate and hotel group. Prosecutors have asked to charge him and others in a case linked to the Parmalat dairy group bankruptcy. In this case he has also denied any wrongdoing.

The deal would be earnings accretive for UniCredit's shareholders as from 2009 and bring pre-tax savings of 1.2 billion euros from 2010, according to the joint statement. There would be a one-off pre-tax restructuring charge of 1.1 billion euros.

UniCredit's earnings per share would grow by 17 percent a year on average through 2010. The dividend would also grow progressively, it said.

Capitalia shares have rallied more than 15 percent since the two banks first disclosed a potential deal last week. Capitalia has quadrupled in value since Arpe took over as CEO in 2003.

Capitalia will appoint four members to UniCredit's board but Dutch bank ABN AMRO, Capitalia's largest shareholder and one-time suitor, will not be represented.

Analysts said the Dutch bank's own potential takeover by Barclays or a rival consortium led by Royal Bank of Scotland gave UniCredit a chance to scoop up the Roman bank a year and a half after buying Germany's HVB for $21 billion.

UniCredit will own a joint stake of about 18 percent in influential Italian merchant bank Mediobanca, but it has committed to retain 9.39 percent and sell the rest by the end of 2007.

The bank would have a 16 percent market share in Italy, inching closer to Intesa Sanpaolo, which would remain the biggest in terms of retail branches and market share, although smaller than UniCredit by market capitalization.

UniCredit will have about 9,200 bank branches globally, roughly 960 billion euros in total assets and 40 million customers from Italy to Russia. Outside its home base, it will rank second biggest in Germany and number one in eastern Europe.

The potential takeover has already received Rome's blessing, with Italian Prime Minister Romano Prodi and Economy Minister Tommaso Padoa-Schioppa both backing the deal.

Merrill Lynch (Charts, Fortune 500) advised UniCredit. Former Goldman Sachs (Charts, Fortune 500) banker Claudio Costamagna advised Capitalia, with Rothschild, Credit Suisse and Citigroup (Charts, Fortune 500) providing a fairness opinion to Capitalia.