It wasn't long ago that the private markets shunned Commerzbank (NASDAQOTH:CRZBY), forcing the German bank to take a government bailout.

But with profits returning and noncore assets being cut, investors are beginning to see Commerzbank as a more attractive investment.

At the same time, a German magazine reported this week that two other European banks are considering anything from a linkup to a full merger with their rival. But with one bank denying an interest in Commerzbank, the other potential buyer has yet to comment as Commerzbank remains attractive for a foreign takeover.

Fixing the bank
Despite being based in one of the stronger European economies, Commerzbank encountered its fair share of problems from the periphery and struggling industries. The bank took hits on everything from Greek debt to Spanish real-estate loans while also incurring losses in its portfolio of shipping loans.

The bank's losses required an 18.2 billion euro bailout from the German government, followed by additional capital raises from the markets that diluted shareholders even further. After all this damage, shares are down over 90% from their pre-recession high.

But Commerzbank has been making noticeable improvements.

Having returned, profits are expected to continue growing over the next few years; capital ratios are improving, reducing the need for additional capital; and noncore assets are being reduced. The bank sold its U.K. real estate unit to raise capital and is winding down its holdings of Spanish real estate loans and shipping loans to focus on growing through higher quality assets. By selling off noncore and toxic assets, Commerzbank is able to de-risk itself. And as the risk decreases, Commerzbank begins to look more attractive for a tie-up-like a partial equity swap or operational partnership-or a full takeover of the bank through a merger.

Why Commerzbank?
Commerzbank is now becoming a reasonable bank to acquire if banking conditions in the eurozone continue to improve. According to Reuters, the magazine Bilanz reported on Thursday that France's Societe Generale (NASDAQOTH:SCGLY) and Spain's Banco Santander (NYSE:SAN)are separately considering a tie-up or merger with the German institution.

However, soon after the reports publication, Societe Generale denied such an interest in Commerzbank removing the French bank from the running and questioning the reliability of the report. But despite these words from Societe Generale, Banco Santander or another bank could still be looking at Commerzbank and they would have a few reasons to do so.

The idea of acquiring a bank in a downturn is nothing new and was seen on this side of the Atlantic when Wells Fargo took over Wachovia and vastly expanded its branch network. Although that acquisition occurred as Wachovia teetered on the edge of collapse, it can still be considered a recovery play since taking control of the bank at the bottom allowed Wells Fargo to get it for a low price while still expanding its reach.

A deal with Commerzbank, whether through a tie-up or an actual merger, would give a non-German bank a greater presence in Germany. That could carry major benefits, as Germany remains a bright spot within the slow-growth eurozone.

Commerzbank also looks to have a value proposition for the right buyer. Trading near just half of book value, Commerzbank has a below average price-to-book ratio and appears undervalued compared to Societe Generale or Banco Santander, which respectively trade at 0.77 and 1.21 times book value. This valuation difference likely has to do with a lack of investor confidence in Commerzbank due to its record of poor performance. An acquiring party would have to do its due diligence to find out if Commerzbank is really worth what its books say; but if the book value is reasonable, the market value of Commerzbank could be higher simply by the bank being owned by a bank with greater investor confidence -- like Banco Santander or another stronger institution.

No word yet
Societe Generale has noted it is not a party to any of these alleged talks, questioning the reliability of the original report. Nonetheless, Commerzbank does look like an appealing partner or acquisition for the right European bank. One party that has noted its position is the German government which recently noted it has no plans to sell its 17% stake in Commerzbank. This is another hurdle but not necessarily a dealbreaker as the German government may be convinced to sell for a high enough price or an alternative type of tie up could be completed with the government maintaining its stake or a merger where it swaps its Commerzbank stake for a stake in the combined institution.

For now, European banks are focused on upcoming European Banking Authority stress tests that will determine how much, if any, additional capital they require. After that, barring severely negative results, Commerzbank looks to be in a good position for value and recovery investors, as well as making an attractive acquisition for a foreign bank.