COMMERZBANK AG 
FRANKFURT (Reuters) - Italy's UniCredit (>> UniCredit SpA) has recently told Berlin it is interested in eventually merging with state-backed Commerzbank (>> Commerzbank), two people familiar with the matter said, a combination that would create one of Europe's biggest banks.
Italy's largest bank, which is scouting for potential partners in Europe, signalled its interest in what would likely be an all-share deal which could come once UniCredit's turnaround over the next two years is complete, they added.
UniCredit's early expression of interest to the German government, which owns a 15 percent stake in Commerzbank after rescuing it during the financial crash, lays a foundation for what could be one of Europe's largest cross-border mergers.
Commerzbank's share rose more than 3 percent in Frankfurt following the Reuters report on Wednesday, while UniCredit's stock dipped by almost 3 percent in Milan.
UniCredit's contact with Berlin is at an early stage and one source familiar with the matter said other groups had also expressed an interest in Commerzbank.
A UniCredit spokeswoman declined to comment, adding that it was focused on its turnaround, while Commerzbank declined to comment.
A number of hurdles, including possible German misgivings about ceding one of the country's main lenders to a foreign buyer, would have to be overcome before any deal.
"UniCredit has been in touch with the German finance ministry," said one of the people, adding that while the government was open to a sale, Commerzbank had not shown any interest.
A German finance ministry spokesman said: "officials are contacted by financial investors on a range of issues".
"We have always said that the government does not want to keep its (Commerzbank) stake forever and wants to get a good result for the taxpayer," he added.
CONSOLIDATION DRIVE
UniCredit's move indicates its interest in Europe's largest economy, which has historical and trading ties with Italy and where it already owns HVB, one of Germany's biggest banks.
This puts the Milan-based group among the most obvious candidates for a deal with Commerzbank, which gets around half of its revenues from providing loans and financial services to Germany's so-called Mittelstand firms.
Top executives at Commerzbank and its larger rival Deutsche Bank (>> Deutsche Bank) held unsuccessful talks on a combination last year, a person with knowledge of the matter said.
UniCredit, with a stock market value of almost 40 billion euros (£35.47 billion), is worth roughly three times as much as Commerzbank.
A combination would create one of Europe's largest lenders and fulfil the European Central Bank's desire for bank consolidation, although one European official familiar with German government thinking said Berlin may be reluctant for one of its two commercial lenders to be foreign-owned.
Any deal would require a smoothing of relations between Rome and Berlin, who clashed during Italy's rescue of its banking sector because Germany believed Italy was not respecting the spirit of rules on state aid for failing banks.
The German government would also need to get at least 18 euros per Commerzbank share to avoid a loss on its investment, while private equity firm Cerberus stands to gain from any deal after recently becoming its second-largest investor.
Commerzbank has been restructuring ever since an ill-timed acquisition of Dresdner Bank for 9.8 billion euros in 2008, cutting costs, slashing jobs, closing hundreds of retail branches and reining in its investment banking.
INTERNATIONAL AMBITION
UniCredit's interest also shows that its chief executive, Jean Pierre Mustier, is looking beyond cleaning up the bank, which raised 13 billion euros by issuing new shares this year.
There are signs that the French investment banker's efforts, which included the sale of bad loans, are beginning to pay off, after more than a year in the job.
Last month, UniCredit posted its biggest quarterly profit in almost a decade, adding to a sense that the worst is over for Italy's banks, long seen as the euro zone's weakest financial link.
UniCredit bought HVB in 2005, gaining access to several central and eastern European countries, but people familiar with the situation say it was never fully integrated and remained relatively autonomous, representing powerful German interests.
This year, however, HVB contributed a 3 billion euro ($3.6 billion) special dividend to UniCredit.
(Additional reporting by Silvia Aloisi and Gianluca Semeraro; in Milan and Pamela Barbaglia in London; writing by John O'Donnell; editing by Alexander Smith)
By John O'Donnell and Arno Schuetze
