UniCredit SpA and Banca Popolare di Milano Scrl announced a combined 27.5 billion euros ($37.2 billion) of takeovers yesterday as Italian banks compete for branch networks in Europe's most profitable major market.

UniCredit will purchase Rome-based Capitalia SpA for 21.8 billion euros to create the third-biggest bank by market value in Europe. Popolare Milano will buy Banca Popolare dell'Emilia Romagna Scrl for 5.65 billion euros.

Capitalia was the largest remaining target in Italy while Popolare dell'Emilia has 1,180 branches mostly in the center and south of the country. Italian banks announced a record $85 billion of takeovers last year as they tried to prevent foreign rivals, including Paris-based BNP Paribas SA, from gaining a foothold in Europe's fourth-largest economy.

``Italian banks understood they were too small,'' said Francesco Mantica, Milan-based chief investment officer at Edmond de Rothschild SGR, part of 60-billion-euro money manager LCF Edmond de Rothschild. ``They're merging to maintain a kind of monopoly. Margins are higher in Italy than in the rest of Europe.''

Italian banks charge ``much higher'' fees for checking accounts than in the rest of Europe, the country's antitrust authority said Feb. 5. The average annual cost for an account is 182 euros, compared with 65 euros in the U.K. and less than 35 euros a year in the Netherlands, the watchdog said.

Capitalia Chairman Cesare Geronzi rebuffed takeover approaches from Amsterdam-based ABN Amro Holding NV last year as he sought to steer the bank into Italian hands. Sanpaolo IMI SpA agreed to a 34 billion-euro offer from domestic rival Banca Intesa SpA in August, a month after Spain's Banco Santander Central Hispano SA expressed an interest.

Europe's Biggest Banks

``Banks globally are challenged for growth and Italy continues to be attractive,'' said Patrick Lemmens, who helps manage about $3.5 billion including UniCredit and Capitalia shares at ABN Amro Asset Management in Amsterdam.

UniCredit, Italy's largest bank, said yesterday in a statement that it will swap 1.12 shares for each share of Capitalia. The deal values shares of Capitalia, the No. 3 Italian bank, at 8.41 euros each, or about 5.5 percent more than the last price on May 18. The combined company will have 9,200 branches and a market value of about 95 billion euros, or $128 billion.

Europe's No. 1 bank by market value is London-based HSBC Holdings Plc, valued at 108.5 billion pounds ($213.7 billion), followed by UBS AG of Zurich at 165.8 billion Swiss francs ($134.7 billion). With the purchase UniCredit overtakes euro- region rivals BNP Paribas SA at 87.3 billion euros and Santander.

`No Choice'

Popolare Milano's purchase of Popolare dell'Emilia in Modena, Italy, will create a bank with almost 1,900 branches. Milan-based Popolare Milano said in a statement late yesterday that it offered 1.76 of its own shares for each Popolare dell'Emilia share.

Popolare Milano ``didn't have much choice, given the pace with which deals are being announced nowadays,'' said Emanuele Vigano, who helps manage about $6.7 billion at Bipitalia Gestioni Sgr in Lodi, Italy.

UniCredit, led by Chief Executive Officer Alessandro Profumo, spent more than $25 billion on takeovers in the past two years. He said at a press conference today that 53 percent of UniCredit's revenue will come from outside Italy.

The bank still aims to be ``stronger in our core markets: Italy, Germany, Austria and central and eastern Europe,'' Profumo said. ``There are transactions in the pipeline and they will continue to be there. There's a transaction in the pipeline in central and eastern Europe.''

`Step Back'

The UniCredit deal cost the job of Capitalia CEO Matteo Arpe, 42, who bowed to pressure from Geronzi after months of feuding over merger strategy. Arpe took over as the youngest CEO of a major European bank in July 2003, turning a loss in 2002 into a record profit last year. Shares of Capitalia gained at an annual rate of 51 percent under him, compared with a 15 percent gain for UniCredit.

``Last Monday, the chairman told me about the important merger project,'' Arpe said in a letter released yesterday. Geronzi, 72, who will become deputy chairman of UniCredit, ``told me the possibility was conditional on my availability to take a step back from the operational leadership of Capitalia.''

Geronzi said yesterday at a press conference in Rome that he broke off talks with ABN Amro, the bank's biggest shareholder, because he wanted to find an Italian partner. Capitalia was also linked with Santander in media reports.

``I wanted an Italian tie-up,'' Geronzi said. UniCredit's takeover will bring ``a large portion of the central and southern banking system under protection'' from foreign control, he said.

`Political Blessing'

Profumo and Geronzi won the support of the Italian government for the transaction after a meeting on May 18 with Tommaso Padoa-Schioppa, the finance minister. Padoa-Schioppa, who earlier this year succeed in encouraging investors to join together to keep Telecom Italia SpA under Italian control, called UniCredit's takeover of Capitalia ``a positive fact for Italy.''

``The transaction will conclude just as it is now,'' said Emanuele Vizzini, who oversees $1.2 billion at Investitori Sgr, including UniCredit shares. ``It's got the political blessing.''

Capitalia makes more than half its revenue from retail banking as the Italian loan market expands at an annual rate of 11 percent and consumer credit advances at a rate of 18 percent, according to Bank of Italy data. UniCredit's home network will rise to 5,000 branches, still behind Intesa Sanpaolo SpA's 5,800.

The combined bank will have the largest number of branches in the northeastern and central regions of Italy, and rank No. 2 in the northwestern and southern parts of the country. The two branch networks have only ``limited'' overlap, Profumo said.

`Not Overpaying'

``It's not buying Capitalia at a cheap price, but it's not overpaying for it,'' Cartesio's Vercesi said yesterday.

Profumo said UniCredit may consider more acquisitions in Germany. He didn't elaborate. The company has set aside, for now, plans to acquire France's Societe Generale SA.

``There were talks and we weren't able to make things click,'' Profumo said of negotiations with Societe Generale. ``In this moment we are totally concentrated'' on Capitalia.

``How can I say what will happen in the future?'' he said.

Capitalia shares fell 13 cents to 7.84 euros in Milan, giving the company a market capitalization of 20.3 billion euros. The stock rose 15 percent in the week after May 8 amid speculation about a bid by UniCredit, fueled on May 10 when Profumo, 50, said he was considering bids for Capitalia or Societe Generale.

UniCredit Shares

UniCredit shares fell 19 cents, or 2.6 percent, to 7.08 euros. The shares began trading today without the right to a dividend of 24 cents and the drop was adjusted for the payout.

The purchase was approved by a group of investors, led by ABN Amro, that owns a combined 31 percent of Capitalia and sets the company's strategy. ABN Amro owns about 9 percent of Capitalia, according to spokesman Jochem van de Laarschot, and will not be a part of UniCredit's board.

The decision to buy Capitalia will divert Profumo from moves to expand outside Italy, said Emanuele Vigano, who helps manage about $6.7 billion at Bipitalia Gestioni Sgr in Lodi, Italy, and owns shares in UniCredit. The company's $21 billion takeover of Germany's HVB Group in 2005, Europe's biggest cross-border bank purchase, gave UniCredit 7,400 branches and 35 million customers in 20 countries from Austria to Russia.

`Change of Strategy'

``With the HVB deal, UniCredit had seemed to become a real European player, and now it's going back to becoming more focused on Italy,'' Vigano said. ``It seems a change of strategy. This begs some questions.''

UniCredit is the fastest growing of Italy's top 10 banks. Its assets more than tripled to 823 billion euros in the three years to the end of 2006.

First-quarter earnings jumped 29 percent to 1.78 billion euros. That compares with a 2.6 percent gain to 277 million euros at Capitalia, the product of Banca di Roma SpA's purchase of Bipop-Carire SpA in 2002. Both UniCredit and Capitalia posted record earnings in 2006.

UniCredit was advised by Merrill Lynch & Co. and by its own bankers, the bank said in its statement. Capitalia was advised by Claudio Costamagna, who left Goldman Sachs Group Inc. in March, with Citigroup Inc., Credit Suisse Group and N.M. Rothschild & Sons Ltd. giving fairness opinions.

(Published by Bloomberg, May 21, 2007)