UniCredit Says Bank Austria Dispute Could Result in More Payouts

Investors Allege Italian Bank Understated Value of Bank Austria and HVB

Unicredit warned a dispute over an acquisition could last several more years. Reuters

UniCredit UCG.MI +1.54% SpA said Monday a nine-year-old dispute over its purchase of banks in Austria and Germany could last several more years and result in additional payouts to former shareholders of the acquired banks.

The fight, played out in courts in Munich and Vienna, stems from UniCredit's €15 billion acquisition in 2005 of German rival Hypo Vereinsbank AG, which controlled Bank Austria AG. Investors including British hedge fund Polygon Global Opportunities Masters contend that UniCredit and its advisers intentionally understated the value of the target banks and then worked to bias arbitration over the ensuing dispute, according to court documents reviewed by The Wall Street Journal.

The investors are seeking compensation from UniCredit that could result in up to €2.6 billion ($3.49 billion) in payments to roughly 350 former minority shareholders in the two banks, according to the documents.

A UniCredit spokesman said the lender is confident the price it paid was "fair and adequate and the valuations appropriate."

In its 2014 half-year report published Monday, the Milan-based bank said that it could face additional cash payments to former Bank Austria shareholders. At the end of June, UniCredit set aside €733 million to cover potential charges from legal disputes without disclosing further details.

The case is likely to come before a Vienna court this fall, according to a person familiar with the case.

A court in Munich, hearing a related dispute over the HVB purchase, will take that up after a ruling from Vienna, according to the person familiar with the case. UniCredit said in its filing Monday that the legal fight in Munich could last "a number of years."

Potential costs and provisions for litigations "aren't currently reflected in the analyst consensus for UniCredit, so there is a risk of consensus earnings downgrades or rising risk premium if UniCredit starts to discuss litigation risk," said analyst Eleni Papoula at Berenberg, a German bank.

Nine years ago, UniCredit's bid for Munich-based HVB, Germany's second-largest bank, was seen as a landmark of European financial integration. In 2007, UniCredit moved to buy out the last shareholders of HVB and Bank Austria, which had a separate stock listing in Vienna.

UniCredit offered €129.40 per Bank Austria share, based on a valuation from auditors Deloitte & Touche, hired by UniCredit.

The minority shareholders rejected the offer. Unable to agree on a price, the two sides went to arbitration in 2009.

Fresh conflicts arose when the three-member arbitration panel sought a new valuation expert to assess the share price.

Bank Austria shareholders allege that arbiters and some UniCredit officials cooperated to reach a low valuation.

The arbiters "colluded to deliberately and illegally act in favor of UniCredit" and to the harm of minority shareholders, Polygon said in its complaint, reviewed by the Journal.

The UniCredit spokesman denied that any of its assessment proceedings "have been anything other than fair." The three arbiters denied the allegations and declined to comment further.

Minority shareholders say the auditors hid from them decisions that lowered Bank Austria's valuation, such as omitting certain assets. The valuation methodology was disclosed to shareholders for the first time at a closed hearing in 2010. One missing item shareholders cited in court filings is €3.6 billion that UniCredit owed Bank Austria for its 71% stake in a Polish bank.

Deloitte & Touche and its auditor declined to comment on the case.

The arbitration panel's handling of the case later came under scrutiny from the Vienna court. When the arbitration began, panel chairman Fritz Kleiner, an Austrian accountant, sought new valuations for Bank Austria.

Documents reviewed by the Journal indicate Mr. Kleiner sounded out several experts, discussed the potential appointment with officials at UniCredit and then picked Prof. Aswath Damodaran of the New York University Stern School of Business, whose initial comments indicated he would argue for a lower valuation than other experts.

In response to questions from the Journal, Mr. Kleiner denied he was looking for an expert who would argue for a low valuation. He said he only wanted to assess the experts' qualifications and to inform UniCredit about a potential selection of an expert, but not discuss experts' opinions on valuations.

A Vienna court in 2011 criticized Mr. Kleiner's approach. The judge's ruling, not made public but reviewed by the Journal, said it was a "breach of rules" to discuss opinions with experts in advance. The judge called Mr. Kleiner "biased" and said his "one-sided approach has cast doubts over his impartiality." Mr. Kleiner pointed to a line in the court's verdict that says it has no "general doubts over his trustworthiness."

Mr. Kleiner in November 2011 was replaced as chief arbiter. A year later the panel set a new Bank Austria price of €139.20 per share, 7.6% above UniCredit's original offer but still below minority shareholders' demands of more than €200 per share.

A German court in Munich will soon hear a parallel case on UniCredit's buyout of HVB. The court has said it would base its ruling partly on the Austrian verdict because an additional payment for Bank Austria would also increase the value of HVB.

—Giovanni Legorano contributed to this article.