Elliott and SoftBank set to merge Italian bad loan businesses

By Valentina Za

MILAN (Reuters) -U.S. fund Elliott Management and Japan's SoftBank Group are set to merge their Italian bad loan businesses in a cash-and-shares deal, SoftBank-backed doValue said on Thursday, as the industry consolidates to weather tough times.

Impaired loans at European banks have held at very low levels thanks to government support measures that cushioned the shocks from the pandemic and energy crisis.

Squeezed by higher borrowing costs as interest rates rose, and faced with a dearth of new bad loan sales by banks, debt collectors have been under pressure to join forces.

The non-binding accord to combine Elliott's Italian bad loan manager Gardant with doValue would hand the U.S. fund 20% of the combined business, doValue said.

Elliott would trail SoftBank, which would hold 22.6% of the merged entity. U.S. firm Bain Capital Credit, currently doValue's No.2 investor, would own 10.9% of the new company.

All three investors would back a new share issue doValue needs to meet 565 million euros in bond redemptions in 2025-2026, which it aims to refinance in full or in part.

"Negotiations will now proceed on an exclusive basis aimed at finalising a binding agreement for the potential combination with Gardant," doValue said in a statement.

The deal is expected to close in April, doValue CEO Manuela Franchi told analysts, with the cash call slated for September.

Elliott has been active in Italy's bad loan market, Europe's biggest, since 2016, when one of its funds invested in what then became Gardant.

Gardant's estimated core profit of around 50 million euros compares with doValue's 175 million. However, the latter's market value has fallen to just 150 million after the loss of a key contract in Spain led to impairments on operations there and a 2023 group loss.

Active also in Greece, doValue is southern Europe's biggest loan manager, with 116 billion euros of assets under management (AUM) at the end of last year.

Gardant has 40 billion euros in AUM, but steadier revenue prospects than peers thanks to long-term collection contracts.

The expected merger marks a second deal in quick succession in the Italian sector, where fintech group ION is buying bad loan manager Prelios for 1.3 billion euros.

Recent market conditions reflect a "perfect storm", with banks having high capital reserves and low impaired debts, doValue said as it unveiled a new multi-year strategy.

With the merger, doValue would secure a stream of revenue thanks to Gardant's recent deal to buy BPER Banca's non-performing loan business and provide collection services to the Italian bank for 10 years.

BPER was the last major Italian bank yet to dispose of its loan recovery operations.

A similar deal ties Gardant since 2019 to lender Banco BPM, while the contract doValue has with UniCredit runs out in 2025.

"The envisaged transaction ... is expected to be accretive to cash earnings per share, cash-flow generation and financial soundness," doValue said.

When excluding non-recurring items, the combined group aims for a net debt level of around two times core profit by 2025 after carrying out the new share issue, doValue said.

($1 = 0.9163 euros)

(Reporting by Valentina ZaEditing by Elaine Hardcastle, Susan Fenton and Mark Potter)