* Rising expectations for mergers and acquisitions drive up Italian banking stocks

* Orcel to assess MPS alternative merger and acquisition options

* Banco BPM seen as a potential target

* Threat of takeover could speed up merger talks with BPER

By Valentina Za, Andrea Mandala and Giuseppe Fonte

MILAN, February 12 (Reuters) – The arrival of star negotiator Andrea Orcel as head of UniCredit risks complicating Rome’s attempt to strike a bailout deal for ailing Monte dei Paschi di Siena bank.

Generous tax incentives designed to pave the way for a sale of Monte dei Paschi (MPS) are seen as stimulating further Italian bank mergers in 2021, and UniCredit is weighing its options after rival Intesa Sanpaolo last year secured a fifth in the market with its takeover of UBI.

But Orcel’s search for the best match for UniCredit may be at odds with pressure from the Italian Treasury to reduce its stake in MPS, which cost it 5.4 billion euros ($ 6.5 billion) in 2017. MPS now needs an additional 2.5 billion.

The Treasury expects new Prime Minister Mario Draghi, former head of the European Central Bank, to back MPS reprivatization plans so that it does not become a permanent burden on taxpayers, a person familiar with the matter said. .

“Draghi has… the credibility and authority to convince UniCredit investors that a potential deal could be in their best interest,” said Andrea Resti, professor at Bocconi University in Milan and European Parliament adviser on oversight banking.

Resti said the “ingredients” for consolidation were all in place. “Discounted valuations for banks, but less and less, tax incentives and cost reductions are pretty much the only lever for profit. “

But MPS isn’t the only game in town.

Banco BPM, established in the rich Lombardy region of Milan, is also looking for a partner.

A combined UniCredit and Banco BPM would have a market share of more than 20% in industrial north Italy, rivaling Intesa, analysts at JPMorgan calculated.

Rome intends to rid MPS of any legal risk before selling it, but bankers say the Tuscan bank’s turbulent history favors Banco BPM, as well as its 19.4% stake in asset manager Anima .

The state, meanwhile, is offering to take at least € 14 billion in doubtful UniCredit loans under an MPS deal and cover part of its proposed cash call.

MPS would increase UniCredit’s market share to around 17% in terms of branches, not far from the roughly 19% share UniCredit would get by buying Banco BPM, JPMorgan said.

CLOCK

After Orcel was chosen to be UniCredit’s CEO, he signaled in preliminary contacts with the Treasury that he preferred Banco BPM to MPS, a person briefed on the discussions said.

This person said Orcel had not ruled out a three-way deal if he couldn’t back out of the MPS acquisition.

UniCredit declined to comment on the matter. Orcel was not immediately available for comment.

A three-way deal would face significant execution risks, but many opportunities for cost reductions, with thousands of jobs at risk.

UniCredit and Banco BPM had preliminary merger talks last year, but people familiar with the talks said the terms of an agreement between the two were no longer in place, raising the prospect of ‘a takeover bid by UniCredit.

After talks with UniCredit failed, Banco BPM is considering a tie-up with rival BPER Banca and people familiar with the matter told Reuters the two aim to strike a deal in the first half of 2021.

BPER’s mergers and acquisitions projects are driven by the ambitions of its first investor, the insurer Unipol, which wishes to secure a large distribution network for its products.

Orcel will not take up his post at UniCredit until mid-April, leaving Banco BPM and BPER, respectively Italian banks No.3 and No.5, time to speed up the talks, which, according to a person familiar with the matter , had resumed after a break. .

Unipol boss Carlo Cimbri said on Friday that BPER needed time before committing to mergers and acquisitions as it needed to appoint a new board of directors and integrate 600 newly acquired branches.

But the two banks may have to make a quick decision on a deal, which Exane-BNP Paribas analysts have described as “the most attractive alternative for the management of Banco BPM and … the only transformation option. available for BPER “.

“There are many things that should quickly fall into place: assessments, roles, governance. It’s difficult, but Orcel’s UniCredit threat is precisely what could make this possible, ”said an Italian banker.

$ 1 = 0.8263 euros Additional reporting by Pamela Barbaglia in London and Stephen Jewkes and Gianluca Semeraro in Milan; Editing by Jane Merriman

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