UniCredit's rights issue closed on 27 January.th with 99.8% of new shares subscribed by investors. This appears to be a great success for the bank, and such results may demonstrate a high level of trust from shareholders – that is what UniCredit’s CEO, Federico Ghizzoni, told the press. On 31 Januaryst, “encouraging signals” come from the capital reinforcement of Italian banks, stated Fabrizio Saccomanni, the Managing Director of the Bank of Italy.
It is absolutely true that Italian banks are now stronger than they were a few months ago, but can we regard the various share capital increases as “successful”? The terms of UniCredit’s latest rights issue left existing shareholders with no choice but to subscribe to the new shares. UniCredit’s share capital has been tripled at a price 69% below the market value on the day before the announcement: under such conditions, existing shareholders were forced to buy the new shares to avoid further losses and approximately 67% dilution of their rights. Over the last three years, UniCredit has carried out three separate share capital increases with pre-emptive rights, raising approximately €14.5 billion from its shareholders. At current market values and taking into account the new share capital, the bank has a market capitalisation of €22 billion. Shareholders“ contributions account for two-thirds of the current market capitalisation; can we regard this as ”value creation“ or ”value destruction’?
In an attempt to answer these questions, or at least to better understand the long-term shareholders’ point of view, we have analysed the capital increases undertaken by six major Italian banks over the past year: Banco Popolare's €2 billion in February 2011, Intesa Sanpaolo's €5 billion and UBI's €1 billion in June, Banca MPS' €2.15 billion in July, BPM's €0.8 billion in November, and finally, Unicredit's most recent one. Comparing shareholders' contributions with the current market capitalisation of each bank reveals significant differences:
- Banco Popolare’s shareholders helped to restore almost the bank’s entire capitalisation (98%);
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The current value of Banca MPS and BPM stands at 67% and 62% respectively, following the latest shareholder contributions;
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With the latest share capital increase, UniCredit’s shareholders contributed 34% of the current market capitalisation, but that percentage rises to 66% when previous transactions are taken into account;
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Shareholders at Intesa Sanpaolo and UBI Banca accounted for only 22% and 32% of their respective market capitalisations.
When the majority of a company’s value is derived from recent shareholder contributions, the “value creation” is at least questionable.
The weight of shareholders“ contribution to market value provides a parameter for successful corporate management, but we should also consider share value performance to better understand whether shareholders can also view recent rights issues as ”successful".
To do that, we can imagine we bought shares of each bank on January 1st.st 2011 and exercised all our pre-emptive rights. On January 31st In 2012, only shareholders of Banca Popolare di Milano (BPM) would have made a profit of 3% over 13 months. All other investors would have lost: -19% Intesa Sanpaolo, -21% UniCredit, -38% UBI Banca, -44% Banco Popolare, -52% Banca MPS.
It is true that 2011 was a dramatic year for the Italian market and share values suffered from the country's default risk, but it should be clear that a share capital increase cannot be considered a ’success“, or even ”value creation“. It may create value for shareholders when it is aimed at expanding the business or reducing debt exposure. When shareholder contributions are only needed to restore share capital, management should simply apologise to shareholders and ensure that all future efforts will be aimed at regaining their trust.