Deutsche Bank

Cerberus banking stake cues wedding bells

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Merger rumors are swirling around Germany's largest bank. Source: Reuters

A merger between Germany’s two largest private sector banks, Deutsche Bank and Commerzbank, seems back in the cards after private equity fund Cerberus added a new stake in Deutsche to the one it acquired earlier this year in Commerzbank. And it might come sooner than you think.

Cerberus has proven to be a patient investor, nurturing Austrian bank Bawag for a decade after taking it over before reaping its profit with an initial public offering last month. The two German banks, after flirting with the notion of a merger last year, decided to finish up with their respective housecleaning and agreed to put off consideration of a merger until about 2020 when all that was taken care of.

But that is not necessarily the way banking consolidation works. The chronically ailing Commerzbank may not be able to clean up its act on its own, and could need a rescuer much sooner. Even Deutsche Bank, Germany’s largest bank virtually since its founding in 1870 and long the flagship for German finance, is having trouble righting itself and may need greater economies of scale if its restructuring is to succeed.

“We believe there are attractive long-term opportunities in retail and corporate banking due to Germany’s robust economy, high savings rate, and a number of other factors.”

Cerberus spokesman

Handelsblatt broke the news Wednesday that New York-based Cerberus controls a stake of 3 percent in Deutsche Bank, representing a market value of €930 million ($1.1 billion). The private equity firm headed by Steve Feinberg acquired just over 5 percent of Commerzbank in July. It is the second major bit of shareholder news for the bank this week, after it emerged Tuesday that Morgan Stanley had acquired rights to nearly 7 percent of Deutsche, presumably on behalf of clients who have shorter-term interests.

News of the Deutsche stakes came within hours of the bank’s deputy chief executive, Christian Sewing, declaring that Germany was still lagging behind other European countries in consolidating the sector. “Germany is still overbanked,” he said Monday at Euro Finance Week in Frankfurt, urging that his country catch up with other European nations in reducing the number of banks.

On Wednesday, a spokesman for Cerberus in New York declined to speak about specific investments but said the firm has “a constructive view of European fundamentals” and believes Germany in particular is attractive. “Within Germany,” he added, “we believe there are attractive long-term opportunities in retail and corporate banking due to Germany’s robust economy, high savings rate, and a number of other factors.”

Although there have been rumors that Italy’s Unicredit and France’s BNP Paribas would also be interested in acquiring Commerzbank, the merger of Deutsche and Commerzbank into a German champion still holds considerable appeal. “The business logic is obvious,” said a top executive from one of the German banks.

A merger of Deutsche with Commerzbank, which acquired Dresdner Bank back in 2008, would complete the consolidation of Germany’s postwar “Grossbanken” – the three big private banks that for decades ran a national retail network and held a dominant position in corporate banking. A single powerhouse would also be better placed to do battle with Germany’s other two banking tiers, which control large segments of the retail market.

It would also parallel consolidation on the national level in other industrial countries. The biggest US bank, JPMorgan Chase, for instance, is the result of successive mergers that combined Morgan Guaranty Trust, Chase Manhattan Bank, Chemical Bank, Manufacturers Hanover, First Chicago Bank, Bank One, Bear Stearns and several others. Neighboring France’s finance sector is also far more consolidated than Germany’s.

Nonetheless, some German experts cautioned against expectations of a quick merger given the housecleaning tasks. “A merger won’t become mandatory just because there’s now an overlap in shareholders,” said Ingo Speich, fund manager at Union Investment. “I’d warn against unleashing the whole merger discussion again.”

Even so, as even Mr. Speich acknowledged, Cerberus is a shareholder that “actively” pushes things along instead of just watching it happen. The new stake in Deutsche makes it the bank’s fourth-largest shareholder after Chinese conglomerate HNA, the emirate of Qatar, and the Blackrock money management firm. The Cerberus stake is separate from the position acquired by Morgan Stanley, industry sources said. Two hedge funds, AQR Capital Management and Marshall Wace, disclosed short positions that may reflect the net between put and call options.

Amid the uproar over the new shareholders, Handelsblatt reported that Deutsche Bank Chief Executive John Cryan finally got around to meeting with the head of HNA, the bank’s largest shareholder. Mr. Cryan recently lunched with Adam Tan and received support for his strategy from the Chinese conglomerate, which owns just under 10 percent of Deutsche. Mr. Cryan had come in for some criticism for “snubbing” the HNA executive amid general tensions about his leadership of the bank.

Critics question whether HNA is in it for the long haul or just making a speculative investment. The two hedge funds, or whoever Morgan Stanley is acting for, might have a similar short-term objective. It is starting to look a lot like one or both of the German banks is “in play” and that is a situation that normally does not last long.

Handelsblatt reporters Andreas Kröner, Michael Maisch, Yasmin Osman, and Robert Landgraf contributed to this report. Handelsblatt Global editor Darrell Delamaide adapted it into English. To contact the authors: kroener@handelsblatt.com, maisch@handelsblatt.com, osman@handelsblatt.com, landgraf@handelsblatt.com, and d.delamaide@extern.handelsblatt.com.

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