By Valentina Za, Stephen Jewkes and Andrea Mandala
MILAN (Reuters) - Intesa Sanpaolo <ISP.MI> kicked off on Monday long-awaited consolidation among Italian banks with a surprise 4.86 billion euro (4.05 billion pounds) takeover bid for smaller rival UBI Banca <UBI.MI>.
Italy's top retail bank said it would offer 1.7 newly issued shares for every UBI share tendered to create a European-sized player focused on wealth management and insurance, with more than 1.1 trillion euros in customers' financial assets.
"The banking sector is heading for consolidation in the coming years ... it is in Intesa's interest to reach a size that will allow it to compete ... in Europe," it said in a statement.
Intesa, which was the first among Italian lenders to bet on fees to drive revenues, said the deal would create the euro zone's seventh-largest group by assets with an estimated combined profit of more than 6 billion euros in 2022.
If the offer is successful Intesa would quickly delist UBI and merge with it, aiming to complete the transaction by the end of the year.
To address potential antitrust concerns once the deal goes through, Intesa said it had signed on Monday a deal to sell 400-500 branches of the combined entity to BPER Banca <EMII.MI> and, possibly, some of UBI's insurance assets to UnipolSai <US.MI>.
BPER, Italy's sixth-largest bank, said separately it would launch an up to 1 billion euro capital increase to finance the purchase.
Intesa said it had picked UBI because it had a similar business model and operated mainly in Italy's wealthier north, so as to minimise integration risks.
UBI had no immediate comment. A source close to Intesa said the move had not been previously agreed but was not hostile.
UBI is Italy's fifth-largest bank and the strongest among second-tier lenders.
It had long been seen playing a prominent role in an expected wave of mergers among mid-sized Italian banks and was often tipped as a potential buyer of rival Monte dei Paschi <BMPS.MI> which the state must re-privatise by the end of 2021.
Intesa said UBI, though well managed, lacked the necessary scale to shoulder the digital investments needed in the sector, which is grappling with negative interest rates and rising competition.
SIZE IS KEY
European banks have been unable to repay their cost of capital, hit by tougher rules after the global financial crisis and the European Central Bank's ultra-loose monetary policy which makes lending unprofitable.
Bankers in the euro zone say they need to bulk up to compete with U.S. rivals but diverging regulation across different countries hamper cross-border mergers.
"Size and the ability to compete both domestically and internationally are key ... to adequately reward capital," Intesa said.
The exchange offer values UBI shares at 4.254 euros each, a 36% premium on the average stock price in the month through Friday. UBI shares closed up 5.5% on Monday at 3.491 euros each after the bank presented a new three-year plan.
Intesa said a 2 billion euro negative goodwill would fully cover integration costs estimated at 880 million euros after tax as well as 1.2 billion euros in planned net loan writedowns, needed to allow UBI to shed some 4 billion euros in impaired loans.
The deal is forecast to eventually generate 730 million euros in annual pre-tax synergies, mostly through cost cuts after 5,000 voluntary layoffs, partly compensated by new hiring.
(Reporting by Valentina Za; Editing by Muralikumar Anantharaman)