Unicredit’s rights issue: a no way out situation for long term shareholders

Posted on January 5, 2012

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On December 15th General Meeting, Unicredit’s Directors asked shareholders to approve €7.5 billion share capital increase to be carried on through a rights issue. A capital strengthening was requested by the EBA (European Banking Authority) and Unicredit actually needed it also following third quarter’s €10.16 billion devaluation of Unicredit’s investments. Considering other measures to be taken, Frontis Governance and ECGS criticized the amount requested to shareholders, estimating more than 45% of dilution for current shareholders and that €5 to €5.5 billion increase would have been enough to meet new share capital requirements. Some financial analysts showed the same concerns: Intermonte’s analysts evaluated the size of the capital increase as excessive and expressed concerns about the possibility to utilize the extra money to further acquisitions (Il Sole 24 Ore Radiocor, November 14th, 2011). Anyway, at the Meeting shareholders approved the rights issue at 97%.

Last January 4th Unicredit’s Board of Directors finally disclosed the terms of the rights issue, starting on January 9th: each Unicredit shareholder will be able to subscribe 2 new shares per each share held at a subscription price of €1.943, the total amount of new shares to be issued will be 3.86 billion, versus a current outstanding of 1.93 billion shares. Shares outstanding will be tripled, subscription price will be 69% lower than the January 3rd closing price (€6.33): is it good for long term shareholders? In our view, absolutely not, for a very simple reason: Unicredit shareholders have no choices but subscribing the new shares if they do not want to dilute their dividend rights of 67% and because after the rights issue the market value of their shares will likely drop well below €6.33 (Unicredit shares already dropped 14.5%, to €5.415, on January 4th).

Unicredit’s management was certainly aware of the very low appeal of the deal, so they decided for terms that force minority shareholders to subscribe. But if such sentiment was feared by the issuer and if analysts criticized the amount of the issue, why 97% of voting shareholders approved it? It is clear a capital strengthening was needed, and that the meeting proposal had to pass, but a higher opposition would have sent a clear message to the Board: be careful, we will monitor all your decisions. A message that is still more than needed if we consider the on-going Unicredit shareholders’ value destruction: €9.3 billion third quarter’s net losses (due to past acquisitions), €38 million extra severance payments to former CEO Profumo (the main responsible of such acquisitions) in 2010, 60% drop of share value during 2011, €14.5 billion requested to shareholders during last three years. Probably a greater engagement with the Company and deeper analysis of the item were needed by institutional shareholders and their advisors.

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Posted in: Share capital