UniCredit’s rights issue closed on last January 27th with 99.8% of new shares subscribed by investors. It seems a great success for the bank and such results might demonstrate a high level of trust from shareholders – that is what the UniCredit’s CEO Federico Ghizzoni said to the press. On January 31st, the Managing Director of the Bank of Italy, Fabrizio Saccomanni, stated that “encouraging signals” come from capital reinforcement at Italian banks.
It is absolutely true that Italian banks are now stronger than some months ago, but can we consider the various share capital increases as “successful”? The terms of the last UniCredit’s rights issue did not leave any choice to existing shareholders but subscribing the new shares. UniCredit’s share capital has been tripled at a price 69% discounted versus the market value at the day before the announcement: at 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 performed three different share capital increases with pre-emptive rights, collecting approximately €14.5 billion from its shareholders. At current market values and considering the new share capital, the bank capitalizes €22 billion. Shareholders contributions weight for two third of current market capitalization, can we consider this a “value creation” or a “value destruction”?
Trying to give an answer to these questions, or at least to better understand the long-term shareholders point of view, we analyzed the capital increases performed by 6 major Italian banks during the last year: Banco Popolare’s €2 bln in February 2011, Intesa Sanpaolo’s €5 bln and UBI’s €1 bln in June, Banca MPS’ €2.15 bln in July, BPM’s €0.8 bln in November and finally the last Unicredit’s one. Comparing shareholder’s contribution with the current market capitalization of each bank results strongly differ:
- Banco Popolare’s shareholders contributed to restore almost the entire capitalization of the bank (98%);
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the current value of Banca MPS and BPM is made of respectively 67% and 62% by last shareholders’ contribution;
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with the last share capital increase UniCredit’s shareholders contributed to 34% of the current capitalization, but that percentage raises at 66% with the previous deals;
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shareholders at Intesa Sanpaolo and UBI Banca contributed for only 22% and 32% of respective capitalizations.
When the majority of a company’s value is made of recent shareholder’s contributions the “value creation” is at least questionable.
The weight of shareholder’s contribution to the market value gives us a parameter of a successful corporate management, but we should also consider the share value performances to better understand whether also shareholders can find recent rights issues as “successful”.
To do that, we can imagine to have bought shares of each bank on January 1st 2011 and exercised all our pre-emptive rights. On January 31st 2012 only shareholders of Banca Popolare di Milano (BPM) would have gained: 3% in 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 has been a dramatic year for the Italian market and shares’ value suffered the country’s default risk, but it should be clear that a share capital increase cannot be considered as a “success”, not even a “value creation”. It may create value for shareholders when aimed at expanding the business or at reducing debt exposure. When shareholder’s contributions are only needed to restore the share capital, the management should just say sorry to shareholders and ensure that all future efforts will be aimed at regaining their trust.