Generali Woes Defy Easy M&A Solution

Italian national treasures are becoming an endangered species. Generali’s stock jumped on Monday after La Stampa reported it could be the target of a takeover approach by Germany’s Allianz, with lender Intesa Sanpaolo as a wing-man. Generali’s woes aren’t so easily solved.

A plain-vanilla merger might create some opportunities for cost savings, but would face challenges. The company would bring together the first and second players in German life insurance, with a combined market share of over 30 percent. They would also come close in Italian property and casualty business. A deal would also be a volte-face for Allianz chief executive Oliver Baete, who has said he wants to do bolt-on deals away from life insurance, which makes up nearly two-thirds of Generali’s operating profit.

There might be a more creative solution, if Generali, which had a market capitalisation of 22 billion euros at the close of Jan. 23, could be carved up. The company’s shares trade at a discount to the sector of over 10 percent, at just over nine times forward earnings. AXA might be a more natural owner for some of the Italian business, and Allianz the French property and casualty non-life.

The wrinkle would be the Italian business. Bonds issued by the Italian government amount to more than twice Generali’s equity. Intesa Sanpaolo might have a hard time explaining to shareholders why it would want to take those onto its own balance sheet. The Italian government, while weak and generally hands-off, may be reluctant to see Generali pass into foreign hands in an election year, so soon after sunglasses maker Luxottica shacked up with France’s Essilor.

But the reality is that shareholders deserve a break. Generali’s stock has sharply underperformed peers AXA and Allianz, returning just 34 percent over five years. Newly installed boss Philippe Donnet is fielding tough markets in France and Germany and low interest rates. Bernstein expects earnings to fall 3 percent each year through 2018, versus a peer average of 4 percent growth. The biggest challenge to a Generali takeover is that it’s difficult to engineer, not that going solo is a better proposition.

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