Andrea Orcel surprised Germany last week by increasing UniCredit’s share in Commerzbank from 9 percent to 21 percent, a strategy reminiscent of tactics used during hostile takeover attempts over a decade ago.
In 2008, when automaker Porsche and automotive supplier Schaeffler Group targeted prominent German companies like Volkswagen and Continental, they quietly amassed their stakes. At that time, there was no legal requirement to disclose positions accumulated through derivative instruments that provided access to shares at a future date.
This loophole in EU disclosure regulations has since been closed, rendering large-scale covert stake-building unfeasible.
For Orcel, a former M&A banker turned chief executive of UniCredit, the stricter disclosure regulations for financial derivatives offered a different avenue: UniCredit can now announce a 21 percent stake in Commerzbank while adhering to rules that currently restrict it to owning no more than 10 percent.
“Regardless of what you think, this is just masterfully executed,” remarked a banker based in Frankfurt.
At the heart of this maneuver lies an arbitrage between two regulatory frameworks.
Eurozone regulations on bank ownership dictate that no entity can own more than 10 percent of a bank without prior consent from the European Central Bank (ECB).
While obtaining approval is typically a formality for a bank like UniCredit, which had already indicated it would seek ECB approval after acquiring its initial 9 percent stake, the process can be lengthy. This delay allows competitors to establish their own positions, hedge funds to procure shares, and the target bank to enhance its defenses.
However, ECB authorization is only necessary for UniCredit to gain control of the voting rights associated with Commerzbank shares. The regulations do not prevent the Italian bank from obtaining economic exposure to the target’s shares beforehand or from entering into contracts to receive shares post-ECB approval.
The disclosure requirements concerning share ownership, implemented following the Porsche and Schaeffler incidents, concentrate on requiring investors to disclose positions when they hold — directly or indirectly through derivatives — an economic interest in 5 percent of the shares or higher, including thresholds at 20 percent.
This inconsistency allowed Orcel to announce a significant increase in UniCredit’s stake in Commerzbank, catapulting it from a minority investor to surpassing the German government as the largest shareholder. The magnitude of its position also complicates matters for potential competitors if a takeover endeavor is pursued.
Central to the arrangement are contracts UniCredit struck with Barclays and Bank of America, as indicated by voting rights disclosures and bankers familiar with the transactions.
Both investment banks entered into so-called total return swap agreements with UniCredit, effectively committing to mirror the economic performance of Commerzbank’s stock. Should the shares of the German lender rise, or if the bank distributes dividends, the counterparties will compensate UniCredit for the value change. Conversely, if the stock value declines, UniCredit bears the loss.
Barclays and BofA have also promised to physically deliver the Commerzbank shares to UniCredit later, provided the Italian bank still desires them. Although the banks have acquired some Commerzbank shares directly, they have primarily hedged their trades through put and call options, according to disclosures.
Sources familiar with the arrangement state that each investment bank stands to earn €12 million in fees and additional income from the trade, which has a notional value of €2.3 billion. The income for each bank could potentially swell to €40 million-€50 million if the contracts are extended beyond 2026 or otherwise restructured, they noted.
Individuals acquainted with UniCredit’s intentions claimed the fees were “considerably lower,” without providing further details.
“A total return swap, in itself, isn’t a particularly complicated transaction and is relatively straightforward technically,” stated former senior Deutsche Bank derivatives trader Pius Sprenger.
However, Thomas Schweppe, a former Goldman Sachs M&A banker and founder of Frankfurt-based investor advisory firm 7Square, noted that “executing it on such a grand scale, as seen in the Commerzbank instance, required considerable determination.”
Moreover, last week’s 11.5 percent total return swap was merely one step in Orcel’s strategy to acquire Commerzbank.
Preparations for the acquisition commenced in 2023 when the Italian lender discreetly built a direct stake of just under 3 percent, as confirmed by two individuals with direct knowledge of the situation, remaining below the first disclosure threshold for direct holdings.
In August 2024, when speculation arose that the German government might start reducing its 16.5 percent stake, UniCredit secured another 1.7 percent through a much smaller total return swap, still below the 5 percent threshold for combined direct and indirect holdings.
Then, on the evening of September 10, the Italian bank acquired another 4.5 percent from the German government by outbidding financial investors in a block trade, surpassing the 5 percent disclosure threshold for the first time and subsequently disclosing its 9 percent stake. By September 23, it had transformed its initial, smaller total return swap into shares.
On that same day, UniCredit entered into two much larger total return swaps concerning stakes of 5 percent and 6.53 percent, which will expire in 2026. A two-year exercise period — significantly longer than the anticipated six to twelve months required to obtain regulatory approval — indicated that the Italian bank was “patient,” as noted by one insider.
UniCredit negotiated the derivatives without external advisers, leveraging its internal expertise, according to insiders.
The equity and credit sales and trading team at UniCredit is led by derivatives specialist Salvatore “Chicco” Di Stasi, who joined from UBS last year after having previously worked at Goldman Sachs.
“He possesses something that’s rare, even within a large commercial bank, let alone UniCredit . . . He exhibits remarkable creativity in structuring deals,” remarked a former colleague.
Total return swaps can entail risks. During the 2008 financial crisis, significant declines in VW and Continental shares left Porsche and Schaeffler Group vulnerable to substantial losses as their derivative stakes plummeted in value.
Orcel has mitigated that risk through an additional layer of financial engineering, as disclosed by individuals familiar with the transaction. He is employing a so-called collar to hedge against depreciation in the Commerzbank position while also relinquishing substantial portions of the upside potential.
This structure — comprising opposing call and put options — effectively locks in the Commerzbank share price from last week.
The methodical stake-building accentuates Orcel’s earnestness towards securing control of Commerzbank despite political resistance.
Revealed shortly after the German government announced a halt to the sales of its remaining stake in Commerzbank following UniCredit’s initial stake-building, one insider indicated that Orcel had utilized the transaction to express: “Can you hear me now?”
Another banker familiar with the arrangement remarked that Orcel leveraged the derivatives to “demonstrate his commitment,” aligning his verbal interest in Commerzbank with actionable stakes.
Hedging the downside related to the Commerzbank trade reinforces Orcel’s assertion that he could step away from pursuing the German group, as noted by the banker.
Such an announcement could trigger a sharp decline in Commerzbank’s stock price; however, UniCredit’s losses would remain constrained. Conversely, if a future agreement with the German bank does materialize, Orcel could seize complete ownership of the underlying 11.5 percent stake at mid-September valuation without having to pay a substantial takeover premium.
UniCredit’s transactions have also made it significantly more challenging for potential competitors, such as Deutsche Bank, BNP Paribas, or ING, to establish a similar derivatives position in Commerzbank.
Although Commerzbank is a highly liquid stock, nearly one-third of its total market capitalization is committed: 12 percent is owned by the government, while 21 percent is under UniCredit’s control.
As one German banker stated: “For everyone else, mounting a counterbid has grown considerably more difficult.”