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UniCredit SpA is taking out additional protection on its existing holdings in German lender Commerzbank AG and securing optionality for any future moves, people with knowledge of the matter said.  

The Italian bank has been working with Jefferies Financial Group Inc. in recent days to hedge more of its Commerzbank position using complex financial instruments that mitigate the risk of share price declines, the people said, asking not to be identified because the information is private.  

The move allows UniCredit to keep optionality on its holding and could theoretically provide it a path to later raise or lower its stake in Commerzbank, though the bank hasn’t made a decision yet to use the transaction for that purpose, according to some of the people. 

 

Large trades could be seen in some Commerzbank option contracts this week that haven’t previously had much volume. Additionally, Jefferies appeared among the top traders in the bank’s shares in recent days. Its interest in Commerzbank — including the recent trades for UniCredit as well as other clients — will likely soon surpass the 5% threshold that would need to be disclosed in a regulatory filing, according to the people. 

Milan-based UniCredit currently has a 21% holding in Commerzbank, which is mostly in the form of derivatives. The Italian bank said earlier that the majority of its economic exposure has been hedged “to provide it with full flexibility and optionality to either retain its shareholding, sell its participation with a floored downside, or increase the stake further.” 

UniCredit previously used Barclays Plc and Bank of America Corp. to help quietly build up its Commerzbank stake in several stages, Bloomberg News reported earlier. The Italian lender has asked for regulatory permission from the European Central Bank to increase its stake to as much as 29.9%. 

Representatives for UniCredit, Jefferies and Commerzbank declined to comment. 

UniCredit Chief Executive Officer Andrea Orcel shook up the staid world of European finance when he revealed a major stake in Commerzbank last month and said a takeover is a possibility. The move caught parts of the German establishment off guard and triggered a backlash, with the government condemning what it called an “unfriendly” move. Commerzbank shares are now up 52% this year, giving the lender a market value of about €19.4 billion ($20.9 billion).

Takeover Potential

Berlin has said it’s suspending further Commerzbank share sales until further notice, a decision at least partly stemming from its unhappiness over the nature of Orcel’s approach. UniCredit has continued to build up its position in the mean time, boosting its holdings to around 21% including derivatives.

Commerzbank has been preparing for the possibility that UniCredit moves forward with a takeover offer soon, people familiar with the matter said. UniCredit is scheduled to announce its latest quarterly earnings on Nov. 6, after postponing it from the initial plan of late October. That puts it in line with Commerzbank, which is due to report the same day. 

Commerzbank’s new chief executive officer Bettina Orlopp recently warned that a takeover by UniCredit may undermine its lending to the country’s small- and medium-sized enterprises and likely see its credit rating deteriorate significantly. She’s touted the possibility for Commerzbank to hit a share price nearly double current levels as an independent institution.