Problematic structure

Expectations lowered for Deutsche Bank’s DWS IPO

DWS – Deutsche Bank Investment an der Mainzer Landstraße 11-17
Red, in nature, is a warning color. Source: Lêmrich for HB

Market turbulence and an awkward governance structure are forcing Deutsche Bank to trim its expectations for the initial public offering of DWS, the bank’s highly profitable asset management subsidiary.

The DWS IPO will be launched on the Frankfurt stock exchange later this month. Despite the diminished expectations, Deutsche Bank is likely to earn between €1.2 billion ($1.5 billion) and €1.8 billion from the offering, which is being seen as a victory for CEO John Cryan’s efforts to turn around the loss-making lender, Germany’s largest. The bank’s share price has risen 23 percent since it announced the IPO on February 20.

“It is the first IPO of a global asset manager for many years,” DWS CEO Nicolas Moreau said in an interview with Handelsblatt. “It will offer investors the opportunity to supplement their portfolios with an asset manager and invest in the German financial sector.”

Deutsche Bank initially had estimated the IPO would value DWS at €8 billion ($9.8 billion), but the prospectus showed that the likely valuation would be between €6 billion and €7.2 billion when the shares are launched in Frankfurt on March 23. The price range of €30 to €36 a share is at the bottom end of the bank’s expectations, and if it manages to sell an expected 40 million shares, that would also be at the low end of a hoped for 20 percent to 25 percent of shares.

Investors said recent turbulence on German stock markets has contributed to the lower price expectations. Another problem will be the asset manager’s status as a “limited partnership on shares,” known by its German acronym KGaA, a structure that gives minority shareholders limited say in the running of the company. “I’m very skeptical and eager to see how the management will eliminate the multitude of critical points at its road show,” said one large investor.

The IPO’s prospects are also being hurt by comparisons with its chief rival.

For example, DWS promises a steady increase of new client funds of between 3 percent to 5 percent of assets under management, margins on fees of at least 0.3 percent and a payout ratio of 65 percent to 75 percent of net income. But Stuart Graham, a bank analyst at research firm Autonomous, said the new business forecasts are “unrealistic.” He forecasts inflows of only 2.3 percent per year on average over the next two years, about the same level of growth it achieved last year.

The IPO’s prospects are also being hurt by comparisons with its chief rival, French asset manager Amundi, whose assets under management (AUM) stand at €1.4 trillion, nearly double those of DWS. In the asset management field, where stock market valuations of about 1 percent of AUM are standard, Amundi’s share price is only 0.92 percent of AUM, while the projected price range for DWS would be between 0.85 percent and 1 percent. “Amundi is the clear market leader in Europe, which justifies a bigger discount for DWS,” said one investor who requested anonymity.

Deutsche Bank has scored one preliminary success by convincing Japanese insurer Nippon Life to buy 5 percent of DWS’ shares and bring additional assets to DWS as part of a strategic partnership. Mr. Moreau hailed that part of the deal and said it was in line with his goal of building the company’s customer base in Asia. “It’s conceivable that we will make acquisitions in geographic regions outside of Germany where we want to strengthen our position,” he said. “Asia is a possibility or an acquisition in Europe” outside Germany, Austria, Switzerland, Italy and Spain. He also said that the company wanted to expand in alternative investments, such as structured loans and private equity.

Yasmin Osman has been covering banks for Handelsblatt in Frankfurt since 2008 and Anke Rezmer covers the investment fund industry. To contact the authors: osman@handelsblatt.com and rezmer@handelblatt.com.

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