By Silvia Aloisi and Stefano Bernabei and Sophie Sassard
MILAN/LONDON, Feb 13 (Reuters) - Monte dei Paschi pumped up its bid for Antonveneta to trump a rival offer from France's BNP Paribas, paving the way for an eventual state bailout of the world's oldest bank and a political furor in Italy over its finances.
The new disclosure comes in a report by Italy's financial police and is based on statements from an adviser to the seller, Spain's Santander. Reviewed by Reuters, the document reveals for the first time why Monte dei Paschi may have offered such a high bid for its smaller Padua-based rival and why it did not conduct any due diligence before agreeing the deal.
Italy's third-largest bank has previously publicly acknowledged that it did not carry out due diligence for the 2007 bid but it didn't disclose the reasons.
A source involved with the deal, at the heart of a fraud and bribery scandal at the Siena-based bank, has told Reuters that Monte dei Paschi's then chairman Giuseppe Mussari quickly floated a pricey offer for Antonveneta, without consulting advisers, because he feared BNP Paribas would beat him to it.
Emilio Botin, the veteran chairman of Santander, used the bid from BNP Paribas to put pressure on Mussari, according to the police report.
The source said that his firm only got a phone call to help on the deal on the day the acquisition was announced and Mussari did the deal on his own. He further credits Botin with managing "to create a tension" to get a full price.
Prosecutors in Siena are investigating whether Monte dei Paschi's former management deliberately overpaid Santander for Antonveneta and whether bribery was involved. It is not clear if any illicit payments were made and if they were, who was involved.
Monte dei Paschi's current management have said they have found no evidence of bribery.
Reuters has unsuccessfully tried to contact Mussari. His lawyer told Reuters he would not be commenting. Magistrates in Monte dei Paschi's home city of Siena are expected to resume questioning him this week after interviewing him last week as part of their probe.
Santander declined to comment on Botin's role in the deal.
The acquisition stretched Monte dei Paschi's finances to the limit just as the global financial crisis struck, precipitating an eventual state bailout of the 450-year-old bank that has caused a political uproar ahead of parliamentary elections on Feb 24-25.
Mussari, a lawyer with no financial background, left Monte dei Paschi in April after the Bank of Italy demanded a management overhaul in light of the lender's precarious finances. It is dependent on a state lifeline of 3.9 billion euros after losing nearly $1 billion on derivative trades.
In the report by Italy's financial police provided to the Siena prosecutors for their investigation, the police say that Monte dei Paschi eventually agreed to pay 9 billion euros cash to Santander to beat an 8 billion euro rival offer from BNP Paribas, France's largest bank.
The document, reviewed by Reuters and dated March 28, 2012, provides a detailed reconstruction of how the Antonveneta deal came about, based on statements released to magistrates by Alessandro Daffina, head of Rothschild in Italy and a key adviser to Santander on the deal.
Daffina and Rothschild in Italy declined to comment.
The police report, backed up with interviews with people involved with or familiar with the acquisition, reveal for the first time how one of Europe's most infamous boom-time deals was struck.
In August 2007, Spain's largest bank was in the process of acquiring Antonveneta as part of a three-way break-up bid for Dutch bank ABN AMRO, in which the regional Italian lender was valued at 6.6 billion euros, including its corporate banking arm Interbanca.
The three-way bid for ABN AMRO involved a consortium made up of Britain's Royal Bank of Scotland, Santander and Belgian-Dutch bank Fortis. They acquired ABN AMRO for 71.1 billion euros, at the time the world's largest bank takeover. The deal gave each of the bidders a piece of the ABN AMRO empire but its large price tag eventually forced both RBS and Fortis into bailouts.
According to the police report, Santander was looking to sell Antonveneta even before it had finalised its own 6.6 billion euros purchase of it and asked Rothschild to put out feelers to find a buyer.
Botin set one, non-negotiable condition, according to the financial police report: There would be no due diligence on the Italian lender.
Sources familiar with the matter have told Reuters that Mussari was keen to buy Antonveneta to ensure his bank became a national player.
Monte dei Paschi had lost out to ABN AMRO on a bid for the smaller bank in 2005. Back then, Monte dei Paschi had carried out due diligence on Antonveneta.
A successful BNP Paribas bid would have made it a major player in the Italian market and would have consigned Monte dei Paschi to the second tier.
According to the police report, Rothschild contacted Monte dei Paschi and four other potential buyers: Italy's UniCredit and UBI Banca, and France's Credit Agricole and BNP Paribas. Only UniCredit wasn't keen, with all the others "strongly interested", the police report said.
Monte dei Paschi's current chairman, Alessandro Profumo, who in 2007 was chief executive of UniCredit, confirmed recently that Unicredit had been approached but rejected the idea of buying Antonveneta because it thought it was too expensive.
UBI Banca declined to comment. Credit Agricole was not immediately available to comment.
"AN EXTRAORDINARY OPPORTUNITY"
Botin, who was dealing directly with BNP Paribas, preferred a sale to the French bank, according to the police report.
BNP Paribas had bought Italy's BNL for 9 billion euros in 2006 and another acquisition would have strongly expanded its foothold in Italy.
Botin, the police report said, regarded BNP Paribas as "more reliable" than Monte dei Paschi, both in terms of financial strength and being able to close the deal quickly.
On the evening of November 6, 2011 - two days before the deal was announced - two offers were on the table, according to the police report: one for 8.25 billion euros from Monte dei Paschi, and another for around 8 billion euros from BNP.
The French bank's proposal was not only lower but also less firm than Monte dei Paschi's. According to the police report, BNP would pay 7 billion euros at the closing of the deal, and an extra 1 billion euros depending on Antonveneta's financial results in 2008.
A spokeswoman for BNP Paribas said the information on the amount BNP Paribas tabled for Antonveneta was inaccurate. She declined further comment.
On November 7, Botin told Rothschild in Madrid that Mussari had agreed to raise Monte dei Paschi's offer to 9 billion euros and forsake doing due diligence, the police report said.
Botin had told Mussari that if he insisted on having due diligence carried out, he would have sold Antonveneta to the French, who, he said, did not demand doing due diligence, according to the information from Santander's financial adviser that is contained in the police report.
Two people with knowledge of the situation have said that BNP Paribas would not make any acquisition without conducting due diligence beforehand.
In an email dated Oct 29, 2007, Rothschild's Daffina said he had prepared a draft letter for Mussari to send to Botin.
The draft letter is reprinted in the police report. Calling Botin "Dear Chairman", Mussari says the Antonveneta deal would be "an extraordinary opportunity for Monte dei Paschi" and would be fully supported by the Tuscan lender's shareholders.
He said that unlike other possible bidders, Monte dei Paschi knew Antonveneta "extremely well" and would be able to complete the deal "very rapidly and with full mutual satisfaction".
Antonveneta quickly started causing Monte dei Paschi headaches.
In an email to the bank's then CEO Antonio Vigni, Giuseppe Menzi, who as deputy director general of Monte dei Paschi was tasked with overseeing the acquisition, was quoted as saying Antonveneta was poorly organized, its business development had ground to a halt and its loan book growth stood at zero.
"There are critical points and they need to be addressed with a shock therapy," said the email, dated Nov. 15, 2007 and included in the police report.
Menzi declined to comment.
The Antonveneta deal transformed Monte dei Paschi into the country's third largest lender, but the bank - and its shares - never fully recovered from the cost of the acquisition, which together with the euro zone debt crisis, stretched its balance sheet close to breaking point.
At the time the deal was announced, Monte dei Paschi shares were worth more than 4 euros, compared with less than 0.25 euros now.