Deutsche Bank Said to Prepare Plan B If Takeover Talks Fail
(Bloomberg) -- Deutsche Bank AG is working on an alternative strategy to present to investors should takeover talks with rival Commerzbank AG collapse, according to people familiar with the matter.
Some top shareholders want the bank to prepare options as obstacles to a combination pile up, according to people familiar with the matter. Chief Executive Officer Christian Sewing is considering two basic scenarios: a small update that would mainly consist of more and accelerated cost cuts including at the investment bank, and a bigger strategy shift that would create upfront costs, said one of the people.
Formal talks between the two lenders have dragged on for almost five weeks and there’s no indication that an agreement is near. Opposition has been mounting as labor unions seek to prevent tens of thousands of job cuts, and political support has waned. Even inside the banks, there’s an acute awareness of the many obstacles to a deal, leaving executives still undecided whether they should move forward, according to people briefed on the talks.
At least two of Deutsche Bank’s largest investors said they would want to see a new strategy from Sewing should the discussions fail. It wouldn’t be credible to simply revert to the old plan because it has proven insufficient to boost profitability and the share price, the investors said, asking to remain anonymous.
A spokeswoman for Deutsche Bank declined to comment.
Deutsche Bank Supervisory Board Chairman Paul Achleitner has said the bank plans to give an update by the publication of their first-quarter results, slated for April 26. Commerzbank had been pushing for an earlier announcement to limit uncertainty for employees, people familiar with the matter have said.
Skepticism about the benefits of a tie-up of the two German lenders was always high, but the discussions had the backing of the Finance Ministry. Even with all the obstacles, a deal could still happen given what’s at stake for the banks and the country.
Among the key obstacles are the prospect of revenue attrition, the uphill battle to achieve cost savings, and the question of how to raise the money needed to pay for a transaction. People involved estimate that clients seeking to reduce their exposure to a combined bank could pull as much as 1.5 billion euros ($1.7 billion) of their business.
A takeover would probably also trigger a revaluation of some of Commerzbank’s assets, which it has on its books at about 2.4 billion euros more than their current market value, though the actual writedown would probably be lower. And then there are restructuring expenses, estimated at around 4 billion euros by people briefed on the talks.
All of these obstacles would reduce the benefit from cost savings that could be achieved by cutting overlapping branches and jobs. As many as 40,000 positions are on the line, according to unions, a number that has labor representatives at both banks up in arms. Lawmakers across the spectrum, including from Finance Minister Olaf Scholz’s Social Democratic Party, have signaled opposition to the cuts.
“We oppose the merger of Deutsche Bank and Commerzbank and that’s why there’s no possibility, no scenario in our view, no conditions under which it could be successful,” Jan Duscheck, a union official on Deutsche Bank’s supervisory board, said in an interview with Bloomberg TV.
For some, that could make a foreign bid for Commerzbank more palatable. Dutch lender ING Groep NV has reached out to the bank and the German government to seek talks, people familiar with the matter have said. Ralph Hamers, CEO of the biggest Dutch bank, even pledged to cut fewer jobs than a Commerzbank-Deutsche Bank deal would require, and to move ING’s headquarters to Frankfurt from Amsterdam, according to Manager Magazin. UniCredit SpA, too, is said to weigh a potential bid.
A collapse of the negotiations would raise questions about both banks’ futures. While they could revert to their own turnaround plans, both have struggled to show they can grow their business and produce sustainable and competitive profits. Deutsche Bank in particular could come under pressure to present new strategic options, because it has been stuck in what finance chief James von Moltke last year called a “vicious circle” of declining revenue, sticky expenses, a lowered credit rating and rising funding costs.
The focus of the talks has recently shifted to the future of Deutsche Bank’s troubled investment banking unit, one person familiar with the discussions has said. Commerzbank has been assessing its rival’s willingness to restructure the business and financial watchdogs are seeking clarity just how much a combined bank would rely on the securities unit, people have said.
The unit has long been a sore spot for the bank, going through multiple turnaround efforts under a string of leaders that have failed to return it to growth or boost profitability. Guidance for a weak performance in the first three months of this year indicates it’s on track to record an eighth consecutive quarter of declining revenue.
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