Mediobanca hit by merger setback Italy's antitrust authority has suspended a proposed merger of Italian insurer Fondiaria-Sai with local rival Unipol, dealing a blow to the two groups and the deal's main co-ordinator and underwriter Mediobanca. The ruling, a suspension that will last for 45 days while the authority investigates the merger, goes to the centre of a debate about the value to investors of Italy's corporate culture of cross-shareholdings. The authority said it would be investigating the links between Mediobanca, the traditional bank of Italy's financial system, Unipol, Fondiaria-Sai and Generali, Italy's largest insurer by premiums. Mediobanca is a big creditor to Fondiaria-Sai, an insurer owned by one of Mediobanca's boardmembers. The bank is leading the underwriting consortium for the merger to bolster the balance sheets of the two insurers through a capital increase. Mediobanca is also Generali's largest shareholder. Analysts said the suspension could prove fatal for the merger. The most likely scenario is that the authority will ask for a material downsize of the non-life business implying very limited synergies . . . This outcome would strongly reduce the benefits of a deal," Cheuvreux analysts said in a note. Shares in Mediobanca fell 1 per cent, having already lost about 30 per cent of their value in three months partly on concerns about its exposure to €1.05bn in unsubordinated debts at Fondiaria-Sai. Fondiaria-Sai shares were 3 per cent lower. Unipol shares traded 1.5 per cent higher. Analysts and bankers have seen clear obstacles to the deal including a large 32 per cent market share of the combined entity in the non-life business and the link with Generali, a big competitor, given the presence of Mediobanca in the deal. It has been fervently opposed by two investment funds, Sator and Palladio, that own a combined 8 per cent stake in Fondiaria-Sai and have said one of the main thrusts of the merger was to allow the insurer's creditors to recover their debts. In an open letter to Italian regulators and company auditors last week, they said the transaction would be "detrimental, not just to Fon-Sai and its minority investors, but to the reputation of Italy and would act as a disincentive for international investors to operate on our market." Under the proposed deal, Unipol would take a controlling stake in Fondiaria-Sai's parent, Premafin Finanziaria, and would then participate in a capital increase by Fondiaria-Sai to take control of it. Unipol then would fold Premafin, Fondiaria-Sai and a small subsidiary, Milano Assicurazioni, into itself to create a single insurance company that would rival Generali. Mediobanca would hold €1.45bn subordinated debt in the combined entity, analysts estimate.