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UniCredit hits resistance from German corporate elite over

Commerzbank bid

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Orcel shifts focus to Banco BPM with a 10 bln euro offer

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Commerzbank takeover now seen as in doubt

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Fears in Germany over repeat of HVB scenario

By Tom Sims, John O'Donnell and Valentina Za

MUNICH/FRANKFURT/MILAN, Nov 29 (Reuters) - Just days

before UniCredit CEO Andrea Orcel set his sight on a takeover

target in Italy, more evidence emerged of fierce resistance to

his interest in German flagship lender Commerzbank.

A group of customers from Germany's corporate elite pleaded

with Commerzbank's CEO to reject a deal, according to people

involved in the meeting at the bank's Frankfurt headquarters,

underscoring the depth of opposition.

They warned Germany's second-largest bank would face the

same fate as a Bavarian bank HVB, which UniCredit bought in 2005

and subsequently overhauled and scaled back.

On Monday, Orcel switched his focus to his home market with

a 10 billion euro ($10.5 billion) offer for smaller Italian

rival Banco BPM, saying this deal would take precedence over any

potential move for Commerzbank.

Orcel had caught the German establishment off guard by

discreetly building a substantial stake in the German lender.

Its announcement in September prompted backlash from

politicians, industry and unions.

They warned of potential job losses and detrimental effects

a takeover might have on lending to small and medium-sized

companies, or Mittelstand, the backbone of Europe's biggest

economy, athough some lobbies were more guarded.

Some in Germany, including finance minister Joerg Kukies,

see his bid as all but dead, and Orcel's shift in focus was

greeted with guarded relief in Commerzbank, according to people

familiar with the bank's thinking.

Orcel may not yet be ready to throw in the towel. The

consummate dealmaker is bracing for a battle in Germany that

could take many months, according to one person familiar with

his thinking. A smaller purchase in Italy could allow UniCredit

to keep moving while working on the bigger catch.

Resistance, however, remains stiff.

Ulrich Grillo, one of the executives at the recent meeting

at Commerzbank, who leads the eponymous chemical maker - a

Mittelstand company - said he told the board he feared key

financing decisions moving to Milan.

Another attendee, the venture capitalist Christian Miele, a

scion of the family famed for its household appliances, said:

"No one in the room was in favour of it."

The meeting capped off weeks of pushback against UniCredit.

After UniCredit snapped up HVB, a bank with its roots in

Munich dating back to the 1860s, it followed up by slashing the

workforce by two thirds and shuttering hundreds of branches,

reducing the bank to a shadow of its former self. The shrinking

in HVB's workforce accelerated under Orcel since he took over as

UniCredit CEO in early 2021.

In a highly unusual move for a bank, Orcel also pushed

through a change of HVB's legal form, shedding the "AG" status

which protects the independence of the board in favour of a

"GmbH" legal form which allows shareholders to guide the board.

Interviews with dozens of national and local politicians,

CEOs, trade union and government officials laid bare fears that

Commerzbank could be a grim repeat, eroding a lender critical

for Mittelstand, hardening resistance to any deal.

TURBULENT TIME

UniCredit's swoop on Commerzbank came at a time of economic

and political turmoil in Germany, with the economy grinding to a

halt and a political vacuum in Berlin after the collapse of the

governing coalition.

This stoked fears that Orcel could take advantage of

Germany's weakness to clinch a deal, fuelling concerns of a

wider erosion of the country's significance.

Boris Rhein, the premier of Commerzbank's home state of

Hesse, recently told a room of CEOs, including Commerzbank's,

that the nation's No. 2 bank must not be allowed to be swallowed

up.

"We should give wind to the sails of such a flagship and not

allow it to run aground," Rhein, who belongs to the Christian

Democrats likely to lead Germany's next coalition government,

said.

From UniCredit's perspective, HVB's revamp has been a

success - resulting in less hierarchy and faster decisions on

loan approvals. All the while, HVB, in the words of Orcel,

"crushed costs" - to 44 cents for every euro of income by 2023,

down from 59 cents in 2005.

A senior UniCredit executive denied that decisions about the

financing of German companies were made in Italy or at the group

level, noting that the local decision-making process had been

empowered over the last three years.

Since taking the reins at UniCredit, Orcel has focused on

boosting returns, driving a near five-fold increase in its share

price.

In an indication that a Commerzbank takeover for now is on

the backburner, Orcel on Monday told analysts that Germany's

upcoming early elections meant "there would have been no base or

ability to move in the short term. And maybe there won't be an

ability to move at all."

"By the time we would have closed the second bid, we would

have integrated the first bank," Orcel said.

Italy's third-largest bank Banco BPM has been on

Orcel's wish list since he became CEO. Buying Banco BPM would

help UniCredit reduce the gap with Intesa Sanpaolo,

which in 2020 leapfrogged UniCredit to become Italy's biggest

bank.

"He's sending a message to the Germans," said Richard

Portes, professor of economics at London Business School. "He

can wait for Commerzbank."

(Additional reporting by Stefania Spezzati in London; Editing

by Elisa Martinuzzi and Tomasz Janowski)