UniCredit defies Germany using derivatives to get 21% Commerzbank stake

By Valentina Za

MILAN (Reuters) -Italy's UniCredit defied Germany's defence of Commerzbank by using derivative contracts on Monday to raise its potential stake in the German bank close to 21%, while waiting for regulatory approval to go above 9.9%.

UniCredit CEO Andrea Orcel's bold attempt to build Europe's biggest bank has become a test of the bloc's resolve to overcome national borders to retain global relevance.

Orcel's latest move comes after Germany's finance agency on Friday said it would not sell any more shares in Commerzbank for now, adding the bank's strategy was "geared towards independence."

"UniCredit believes that there is substantial value that can be unlocked within Commerzbank, either stand-alone or within UniCredit, for the benefit of Germany and the bank's wider stakeholders," the Italian bank said in a statement.

Commerzbank had no immediate comment.

By 1233 GMT shares in Commerzbank fell 0.8% and UniCredit dropped 2% against a 0.6% European sector drop.

Italy's Foreign Minister Antonio Tajani on Monday praised UniCredit's strategy, saying the European Union had a single market.

"Being pro-European only in words leaves something to be desired," Tajani said.

Orcel had already blindsided the German government when it outbid rivals at a tender to buy 4.5% of Commerzbank from the state this month, having previously acquired a similar sized stake on the market.

The surprise move comes at a time of political upheaval in Germany, where the three political parties governing the country frequently clash and continue to lose ground to the ultra conservative Alternative for Germany party.

This disarray could make it harder for the government to forge a strong response the unwanted Italian advance.

Orcel, a star investment banker who oversaw some of Europe's biggest banking mergers in recent decades, has repeatedly said he would not have moved unless he knew he was welcome, and would not act aggressively because any deal would need broad agreement.

The 9% stake makes UniCredit the biggest private investor in Commerzbank after the government, which still retains around 12%. With the latest purchase the Italian bank would become the biggest investor if the European Central Bank approves its request.

The ECB must approve share ownership in a bank crossing thresholds set at 10%, 20%, 30% and so on.

UniCredit said it had applied to increase its Commerzbank holding to 29.9%. Meanwhile it entered derivatives contracts on Monday to acquire a further 11.5% of the bank.

It would only take possession of the underlying Commerzbank shares linked to the derivatives if it secured approval.

"The physical settlement under the new financial instruments may only occur after the required approvals have been obtained," UniCredit said.

UniCredit filed its request with German financial authority BaFin. The ECB has up to 60 days, which can be extended to 90, to rule once it receives the paperwork from BaFin.

Italy's second-largest bank said it had hedged "the majority of UniCredit's economic exposure" to Commerzbank in order to be free "to either retain its shareholding, sell its participation with a floored downside, or increase the stake further."

Any decision "will depend on the outcome of engagement with Commerzbank, its management and supervisory boards as well as its wider stakeholders in Germany."

(Reporting by Valentina Za in Milan; Additional reporting by Tom Sims and John O'Donnell in Frankfurt, editing by Gianluca Semeraro and Louise Heavens)