Banca Intesa and Sanpaolo IMI's plan to create Europe's 10th-largest bank could prompt the exit of Spain's Santander as a shareholder and trigger other deals for Italian banks, analysts said.
France's Credit Agricole, Intesa's top investor with about 18 percent, joined other key investors in welcoming the plan to build a dominant domestic player worth more than $70 billion, even though its stake would halve.
But Spain's Santander, which owns 8.4 percent of Sanpaolo, remained tight-lipped, saying only that it would make a capital gain of 1.2 billion euros ($1.53 billion) if it sold its stake.
Italian newspapers said Santander may not be happy with a pure share deal and may seek a premium to relinquish its stake.
"We place a higher than 70-percent probability of the deal going through and this figure is going higher by the minute," said analyst Marcello Zanardo at Keefe, Bruyette & Woods.
"The important thing was to get Credit Agricole on board. For Santander, the most likely scenario would be for them to sell their stake," he added.
Newspapers Corriere della Sera and Milano Finanza suggested Santander could take a slice of Sanpaolo's fund management arm Fideuram or its Eurizon insurance and asset management business.
Shares in both Intesa, Italy's second-largest bank, and third-largest lender Sanpaolo extended August 24 gains ahead of board meetings of the two banks scheduled on August 26.
Rival Capitalia was also up as investors saw it as a target for the next bank bid, possibly from Italy's leading bank UniCredit Group, which was down 2 percent.
Some analysts said Santander could switch its interest to Capitalia, which rebuffed Intesa's approaches earlier this year.
"Bank consolidation in Italy will first be a national one. Foreign banks will be either cautious to get involved, or are left out," said Christopher Kummer, Director at the Institute of Mergers, Acquisition and Alliances in Vienna.
PRESSURE TO MERGE:
Italian banks have been under pressure to merge since large foreign players entered the domestic market earlier this year.
The deal would be the first major domestic bank merger since pro-consolidation Bank of Italy Governor Mario Draghi replaced Antonio Fazio, who had protected Italian banks, in January.
"Instead of always being the prey, I'd like every now and then to be the predator," Prime Minister Romano Prodi told La Repubblica as he blessed the merger.
The deal will be an all-share swap, a source familiar with the matter told Reuters, and analysts expect an exchange ratio of 3.0 to 3.3 Intesa shares for every Sanpaolo share. Synergies could be worth 600 million to 800 million euros, analysts said.
Current market prices indicate Intesa would have about 54 percent of the merged entity, which would be the top retail player in Italy with 6,300 domestic branches and about 1,000 branches in fast-growing eastern European countries.
The two banks would have total assets worth 545 billion euros, still behind UniCredit's 787 billion euros. The deal is likely to be closed by year end, financial sources told Reuters, and analysts estimates job cuts of up to 10,000.
Intesa Chief Executive Corrado Passera, who has been seeking a partner for his bank for months, is likely to head the new bank. But the headquarters would be in Sanpaolo's home base of Turin, as the banks strive for an unusual merger of equals.
Intesa Chairman Giovanni Bazoli would chair a German-style supervisory board and Sanpaolo Chairman Enrico Salza would become chairman of the executive board. Analysts said a possible conflict of interest in asset management and insurance distribution could be hurdles.
The business of Eurizon, which plans a public offering worth up to 3.5 billion euros later this year, could overlap with the asset management operation of Credit Agricole.
It could also clash with an insurance agreement between Intesa and Alleanza Assicurazioni, controlled by top Italian insurer Generali - which has stakes in both banks and has given its support to the deal.