Commerz ills make M&A a question of when not if
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Liam Proud
LONDON, Sept 25 (Reuters Breakingviews) -The German chancellor, finance minister, trade unions and Commerzbank CBKG.DE itself have all criticised UniCredit’s CRDI.MI aggressive pursuit of the 18-billion-euro Frankfurt-based lender. The Italian suitor’s boss Andrea Orcel, who has grabbed a 21% stake including derivatives, even said on Wednesday that he could walk away absent “the right level of support from all stakeholders”.
It’s striking, then, that investors seem to think a takeover is still likely: Commerzbank’s shares are up 20% since UniCredit’s first move, compared with 4% for the Euro STOXX Banks Index. The answer to the puzzle lies in the German lender’s miserable solo prospects.
Commerz is consistently one of the lowest-returning major banks in the euro zone. This year, it is aiming for a minimum return on tangible equity (ROTE) of 8%, which is far short of a probable cost of equity of at least 10%. Analysts think the bank will fail to hit even its own meagre target. The average Visible Alpha forecast envisages a 7.8% ROTE in 2024.
The job for new Commerz CEO Bettina Orlopp is to carve out a convincing standalone story that would justify the bank’s quest for independence. Possible options include more cost cuts, which would help to boost returns and offset the effect of falling interest rates. There’s a long way to go. Commerzbank’s operating expenses will absorb 60% of revenue this year, compared with an average of 47% for the Euro STOXX Banks Index, based on analyst estimates gathered by LSEG.
There are two problems with wielding the axe, however. First, it undermines one of the stronger lines of defence against Orcel and UniCredit, which is that a deal would cost too many jobs. That argument gets weaker if Orlopp plans to embark on aggressive cuts of her own. Second, it’s likely that Commerz’s high expense ratio reflects a lack of scale in Germany’s highly fragmented and partly state-backed banking market. Deutsche Bank analysts reckon that large domestic banks hold just 15% of the country’s retail deposits, partly explaining why both Deutsche and Commerz struggle to earn decent returns.
Perhaps Orlopp could focus on boosting scale herself. But possible acquisition targets like OLB and Hamburg Commercial Bank would not move the needle: combined, they have 65 billion euros of assets, or just 11% of Orlopp’s total. Merging with Deutsche, meanwhile, could result in more job cuts than the UniCredit deal, and would also see Commerz lose its independence.
The upshot is that Commerz’s solo prospects are bleak, which was reflected in its valuation of roughly half tangible book value before UniCredit’s move. That may offer Orcel cause for hope, if he is prepared to be patient. The longer that his prey limps along with subpar returns, the more attractive a deal will look to its shareholders, and perhaps even the German government.
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CONTEXT NEWS
Bettina Orlopp will take over as chief executive officer of Germany’s Commerzbank in the near future, the bank said on Sept. 24.
Commerzbank’s deputy chair voiced opposition on Sept. 24 to a takeover of the German bank by Italy’s UniCredit. Speaking in front of Commerzbank’s headquarters in central Frankfurt, Uwe Tschäge said the message was clear: “We don’t want this”.
Three supervisory board members – Tschäge, Sascha Uebel and Stefan Wittmann, who all represent employees – made an appearance that marked the latest volley in the potential takeover battle, Reuters reported.
German Chancellor Olaf Scholz on Sept. 23 called UniCredit’s pursuit of Commerzbank “an unfriendly attack”.
“Unfriendly attacks, hostile takeovers are not a good thing for banks, and that is why the German government has clearly positioned itself in this direction,” Scholz said on the sidelines of an event in New York.
Earlier in the day on Sept. 23, UniCredit said that it had bought a further 11.5% of Commerzbank through derivatives, taking its total potential holding to around 21%. The new financial instruments will only turn into shares once the Italian bank exercises the contracts, which it said it would not do until it had received regulatory approval to cross the 10% ownership threshold.
Commerzbank shares were trading at 15.14 euros as of 0701 GMT on Sept. 25, which was 20% higher than the day before UniCredit first unveiled that it had bought a stake. The Euro STOXX Banks Index was up 4% over the same period.
Graphic: Commerzbank’s subpar returns on tangible equity https://reut.rs/3zlrZFj
Editing by Neil Unmack and Oliver Taslic
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