Andrea Orcel surprised Germany last week by significantly increasing UniCredit’s stake in Commerzbank from 9 percent to 21 percent. This move echoed strategies previously used in hostile takeover battles more than a decade ago.
In 2008, automaker Porsche and automotive supplier Schaeffler Group surreptitiously built their stakes in German companies Volkswagen and Continental. At that time, there was no legal obligation to disclose positions built through derivative instruments that provided access to shares at a later date. However, the EU has since closed this loophole, making large-scale secret stake-building impossible.
For Orcel, a former mergers and acquisitions banker and now CEO of UniCredit, the stricter disclosure rules regarding financial derivatives presented a unique opportunity. UniCredit was able to disclose a 21 percent stake in Commerzbank while adhering to rules that presently prohibit owning more than 10 percent.
“Think what you may, but this is just beautifully done,” commented one Frankfurt-based banker.
At the heart of this strategy lies an arbitrage between two regulatory frameworks. Eurozone laws governing bank ownership and control stipulate that no entity can acquire more than 10 percent of a lender without first obtaining approval from the European Central Bank (ECB). While this approval is generally a formality for EU-based banks like UniCredit, it can take months, providing opportunities for rivals to build stakes and the target to strengthen its defenses.
However, ECB approval is only required for controlling voting rights attached to Commerzbank shares. The current rules do not prevent UniCredit from gaining economic exposure to Commerzbank before receiving central bank approval, nor do they prevent the signing of contracts that allow for the future transfer of shares.
New disclosure rules for share ownership, introduced following the Porsche and Schaeffler incidents, require an investor to reveal their position when they economically own 5 percent of the shares or when reaching higher thresholds such as 20 percent.
This discrepancy allowed Orcel to announce a substantial increase in UniCredit’s stake in Commerzbank. This shift elevated UniCredit from a minority shareholder to the largest single stakeholder, surpassing the German government. The sizeable stake complicates the efforts of potential competitors to make counteroffers for the German bank, should UniCredit pursue a takeover.
The key to UniCredit’s significant stake acquisition was contracts with Barclays and Bank of America, according to voting rights disclosures and informed bankers. Both investment banks entered into total return swap agreements with UniCredit, agreeing to mirror the economic performance of Commerzbank’s stock. If Commerzbank’s shares increase in value or pay dividends, the counterparties will pay UniCredit the difference. Conversely, if the stock value decreases, UniCredit covers the shortfall.
Barclays and Bank of America also agreed to physically deliver Commerzbank shares to UniCredit in the future should the Italian bank desire them. Although the investment banks did not purchase Commerzbank shares directly, they disclosed derivative positions.
Sources familiar with the deal indicated that the two investment banks will each earn €12 million in fees and other income from the trade, which has a notional value of €2.3 billion. If the contracts are extended beyond 2026 or otherwise modified, the income could rise to between €40 million and €50 million. However, individuals familiar with UniCredit’s perspective described these fees as “far lower,” without elaborating further.
Pius Sprenger, a former senior Deutsche Bank derivatives trader, stated that “a total return swap is not a very complex transaction and relatively simple from a technical point of view.” However, applying it on such a large scale required considerable determination, noted Thomas Schweppe, a former Goldman Sachs M&A banker and founder of Frankfurt-based investor advisory firm 7Square.
Orcel’s pursuit of Commerzbank began in 2023 when UniCredit quietly established a direct stake of just under 3 percent, staying below the first disclosure threshold. In August 2024, amidst rumors that the German government might soon reduce its 16.5 percent stake, UniCredit acquired an additional 1.7 percent through a smaller total return swap, still under the 5 percent threshold for combined direct and indirect positions.
On the night of September 10, UniCredit purchased another 4.5 percent from the German government, surpassing the 5 percent disclosure threshold for the first time, subsequently revealing a 9 percent position. By September 23, UniCredit had converted the initial, smaller total return swap into shares.
On the same day, UniCredit entered two larger total return swaps, representing stakes of 5 percent and 6.53 percent, with an expiration date in 2026. A two-year exercise period, much longer than the anticipated six to twelve months for regulatory clearance, indicates the Italian bank’s patience, according to an insider.
UniCredit handled the derivatives negotiations internally, relying on the expertise of its equity and credit sales and trading team, led by derivatives specialist Salvatore “Chicco” Di Stasi. Di Stasi, who joined from UBS last year and previously worked at Goldman Sachs, has been described as “very, very creative as far as structuring is concerned,” by a former colleague.
Total return swaps entail risks. During the 2008 financial crisis, significant declines in VW and Continental shares led Porsche and Schaeffler Group to incur enormous losses when their derivative stakes lost billions in value. However, Orcel has mitigated such risks with an additional layer of financial engineering, employing a collar to hedge the Commerzbank position against share price declines while sacrificing much of the upside.
This meticulous approach underscores Orcel’s commitment to controlling Commerzbank despite political opposition. The strategy became evident when the German government announced a pause in the sale of its remaining stake in Commerzbank.
One insider described the maneuver as a way for Orcel to assertively ask, “Can you hear me now?” Another banker familiar with the deal said Orcel’s use of derivatives demonstrated his serious interest in Commerzbank. Hedging against the downside of the trade backs up Orcel’s claim that he could abandon his pursuit if necessary.
Such an announcement might lead to a sharp drop in Commerzbank’s share price, but UniCredit’s losses would be limited. Conversely, if a future deal with the German bank goes through, Orcel could acquire the underlying 11.5 percent stake at the mid-September price without paying a significant takeover premium.
UniCredit’s maneuvers have also made it more challenging for potential competitors such as Deutsche Bank, BNP Paribas, or ING to build similar derivative positions in Commerzbank. Although Commerzbank is a liquid stock, approximately one-third of its total market capitalization is tied up, with 12 percent owned by the government and 21 percent controlled by UniCredit.
“For everyone else, mustering a counter bid has become quite a lot harder,” said one German banker.
