Foreign Press Alert: 2 Sep 2008 – Germany

In Germany, there are two major concerns at the moment

• The biggest banking merger in Germany’s history involving their #2 and #3 banks and Germany’s largest company Allianz
• The slowdown in the economy

Commerz-Dresdner
First is the Dresdner-Commerzbank situation. I have reported on this deal twice. See my posts, Commerzbank gobbles up Dresdner and Dresdner Bank: looking for suitors, also cross-posted on “Seeking Alpha.” The crux of the Dresdner deal is that Allianz, a large insurance company, has found its 2001 takeover of Dresdner Bank a money loser and they want to get the deal behind them. This is a situation not unlike the Daimler-Chrysler tie-up where Chrysler turned out to an albatross for Daimler and its shareholders and a supreme distraction for Daimler management. Daimler eventually sold Chrysler for a loss to Cerberus.

Commerzbank shareholders did not like the deal and shares of the bank fell more than 10% in trading Monday. Some traders are taking outright paired positions of short Commerzbank and long Allianz. While Commerz trades below book value, like many firms in Germany’s financial sector, it is paying 1.1 times tangible book for Dresdner, which some consider rich.

The deal is a complicated two-step €8.8bn acquisition using cash, shares and asset transfers. Allianz will still retain a 30% stake in the combined entity. Commerzbank will also have to pony up €975 million for a trust to cover Dresdner’s risky portfolio of asset-backed securities (ABS), which ultimately caused Allianz to want free of Dresdner.

Another problem with the deal is Dresdner’s portfolio of business with Germany’s large corporates. German banks have been complaining for some time that their business with large corporates has a low return on capital and ties up to much equity capital that could be employed elsewhere. Commerzbank has freed itself of this segment, but, in buying Dresdner, will have to make a renewed push out of less profitable business with large German corporate clients.

JP Morgan released some compelling research last week demonstrating that the company would also be undercaptalised from the start and would need to raise equity capital in a rights issue.

All of these issues and union opposition to expected job cuts make this a difficult transaction.

The economy
Norbert Walter, the Chief economist at Deutsche Bank, is on record as saying that Germany is in the midst of a pronounced slowdown that could last until 2010. After Germany’s economy contracted by 0.5% in Q2, many fear recession is in the cards for the Germans. Consumers are understandably nervous and in July, retail sales fell for the second month running. And with inflation still very elevated, there is little chance that the ECB will cut interest rates to stimulate the economy.

That said, unemployment in Germany fell to its lowest level in 16 years and investor confidence remains buoyed, demonstrating that all is not doom and gloom in the economy. And inflation has slowed, with figures coming in at 3.1% for the year to August. If inflation continued to slow, this could provide some room for cuts down the line.

So, we should expect a long period of sluggishness in Germany but with improvements in the economic environment throughout 2009.

Sources
Dresdner deal raises concerns – FT
Resurrection of Commerzbank – FT
Keine Bank für Großkonzerne – FTD
Commerzbank confirms €9bn takeover of rival Dresdner – Independent
‘Pronounced slowdown’ in Germany – Fin24
German July Retail Sales Fall as Energy Prices Jump – Bloomberg
German inflation eases in August – Sydney Morning Herald

Related Posts
Commerzbank gobbles up Dresdner
Dresdner Bank: looking for suitors