By John O’Donnell, Valentina Za and Tom Sims

FRANKFURT/MILAN (Reuters) -UniCredit’s CEO approached Commerzbank about exploring merger talks on Wednesday, a source with knowledge of the matter said, after Italy’s second-largest bank bought a 9% stake in the German lender and signalled it was open to buying more.

The raid on Commerzbank by UniCredit CEO Andrea Orcel has reignited speculation of consolidation in Europe’s fragmented bank sector.

But a bigger move on Commerzbank could raise political and union opposition in Germany as well resistance among some within the German bank.

The holding makes UniCredit one of Commerzbank’s largest shareholders and follows previous attempts in recent years to raise the Italian bank’s German presence by acquiring its rival.

UniCredit paid 700 million euros ($773 million) for about half of the 9% by significantly outbidding others in a share sale the government conducted to lower its Commerzbank stake.

It bought the rest on the open market and will seek regulatory approval to buy more “if and when necessary”, said the Italian bank, which already has a foothold in Germany through its ownership of HVB and is flush with excess capital.

A spokesperson for Commerzbank neither confirmed nor denied an approach had been made. The German bank is due to hold a board meeting later on Wednesday to discuss the UniCredit move, and has tapped Goldman Sachs to advise on its options, a person familiar with the discussions told Reuters.

UniCredit declined to comment.

“We think a full takeover of Commerzbank could make financial and strategic sense for UniCredit,” KBW analysts said.

UniCredit’s share price has quadrupled since Orcel’s arrival as CEO in April 2021, valuing it at 59 billion euros, against Commerzbank’s 15 billion euros.

Commerzbank shares closed up 16.6% at 14.69 euros in Frankfurt, while UniCredit’s closed 0.2% higher in Milan.

Orcel’s gambit could also pressure other European banks to consider their strategic options, including Deutsche Bank, which declined to comment on Wednesday.

A person familiar with the Commerzbank’s thinking told Reuters it would consider merger proposals as necessary.

Germany, which now owns 12% of Commerzbank, is likely to hit pause on any further share sales after being taken off-guard, a government source said, adding that the bank and the government needed to assess what is now a new situation.

Commerzbank supervisory board member Stefan Wittmann said he would fight any potential takeover.

“We will do everything we can to prevent it. We will fight it,” Wittmann told Reuters. Wittmann said UniCredit’s HVB buy had led to too many job cuts and moved decision-making to Milan.

Commerzbank CEO Manfred Knof, who has played down the prospect of big tie-ups, said on Tuesday he would step down when his current term ends next year.

European bank executives and regulators have long wanted to consolidate the region’s fragmented market through cross-border deals but have complained of major hurdles, including political opposition, and merger talk has often fizzled out.

Orcel, a former investment banker who is one of Europe’s most experience dealmakers, has repeatedly said that he would consider M&A for UniCredit, provided it meets strict financial conditions. A person familiar with his strategy has told Reuters he looked for at least a 15-20% return on any investment.

One UK-based shareholder in UniCredit described the German move as “clever and opportunistic”, showing discipline while buying “on the cheap with optionality on what to do next”.

UniCredit has built up excess capital – 6.5 billion euros after accounting for Basel IV regulations – as profits soared.

In a similar move last November, it bought a 9% stake in Alpha Bank from Greece’s bank bailout fund.

PAST APPROACHES

The German state has held a 16.5% Commerzbank stake through its bank rescue fund as a result of a bailout 16 years ago during the global financial crisis.

Berlin said last week that it would begin to pare down its holding, a move that began on Tuesday with the sale of some 53 million shares, which reduced its stake to 12%.

German officials had privately expressed reluctance in the past to let a foreign bank buy Commerzbank amid fears it would create an even stronger domestic competitor for Deutsche Bank.

Orcel previously approached Knof about a potential deal in early 2022, before the Ukraine war, people with knowledge of the matter have told Reuters.

His predecessor, Jean Pierre Mustier, had also been working on buying Commerzbank, but political opposition thwarted any deal, according to a person involved in the plans.

($1 = 0.9056 euros)

(Additional reporting by Emma-Victoria Farr, Giulia Segreti, Sinead Cruise and Christian KraemerWriting by Tommy Reggiori Wilkes and Tom SimsEditing by Rachel More, Christina Fincher, Sabine Wollrab, Tomasz Janowski and Alexander Smith)

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