Cerberus’ German bank sale likely just the beginning

Jan 12, 2022 | News

Cerberus’ sale this week of part of its sizeable holdings in Deutsche Bank (DBKGn.DE) and Commerzbank is likely the first step to a full exit from the lenders by the U.S. investor, said two people with knowledge of the matter.

For years, profits in the financial industry of Europe’s largest economy have been under pressure, as banks face stiff competition, high expenses, and ongoing low interest rates.

But Cerberus in 2017 bet big on Germany by buying a 3% stake in Deutsche Bank and a 5% stake in Commerzbank, a move that the two people said was meant in part to capitalise on the prospect of bank mergers.

Since then, the two top lenders have tried and failed to join forces to create a single national banking champion, instead embarking on separate restructurings.

Cerberus, which raked in $500 million in proceeds in Monday’s partial sale of the stakes, didn’t respond to requests for comment.

Deutsche Bank and Commerzbank declined to comment.

By mid-afternoon on Tuesday, Deutsche Bank shares were down 1%, while Commerzbank was 5.2% lower.

The two banks’ overhauls – involving major job cuts and the closure of some business lines – have helped stabilise the lenders, and their stock is well off lows recorded in 2020.

But Deutsche Bank’s shares are still down more than 20% and Commerzbank’s more than 30% since Cerberus first bought in, and regulators and analysts say German lenders remain fragile.

“Cerberus has finally recognised that there is no longer any realistic chance of a merger between Deutsche and Commerzbank,” said Klaus Nieding of shareholder lobby group DSW.

In a recent report, Moody’s said profitability would remain challenging for high cost, net interest-dependent German banks.

In November, S&P lifted its rating on Deutsche, citing “tangible benefits” of its restructuring, but noted that most competitors “have greater business stability and stronger, more predictable profitability”.

The same month, it said that Commerzbank’s restructuring entails a high degree of risk and that it didn’t foresee any improvement in profit before the end of this year.

Cerberus pared its holding of Deutsche Bank to 2% from 3%, and its Commerzbank stake to 3% from 5%. read more

Nonetheless, Cerberus has had a big impact on strategy. In 2020, for example, it launched a vocal campaign for major changes at Commerzbank, prompting a management reshuffle, thousands of job cuts and the closure of bank branches.

Andreas Thomae, a portfolio manager at Deka, a big investor in the German banks, said he thought Cerberus was taking advantage of a recent rise in the banks’ shares and didn’t expect a change in strategy by the lenders as Cerberus retreats.

“Both banks are on a good path to recovery,” he said.

In some ways, Cerberus’ holdings in the banks have been unusual because the firm tends to hold majority stakes in non-publicly traded companies, but it is not unusual for private equity investors to exit their holdings after three or five years.

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Mr Murphy, who remains a director of Walgreens Boots Alliance (WBA), Boots’ US-listed parent company, is expected to need to recuse himself from boardroom discussions about the potential sale of Boots as a result of his interest in the process at CVC.

Sources said Bain and CVC were working on a plan to acquire Boots that was predicated upon substantial investment in its digital, beauty and healthcare services offerings.

A number of other private equity firms are expected to examine offers for the chain as part of a process to be run by Goldman Sachs.

However, Mr Murphy’s extensive knowledge of the Boots business and Bain’s lengthy planning for a bid are expected to leave their joint offer well-placed to succeed.

Both firms have invested heavily in prominent British businesses ranging from Formula One to Worldpay, while Bain has also recently backed Maesa, a French beauty manufacturer.

WBA announced strong trading figures at Boots last week, although the company made no formal comment on its decision to explore a sale.

It remains conceivable that no transaction involving the 172-year old British health and beauty retailer takes place, although a disposal by WBA is viewed as increasingly likely because of its renewed focus on its home US market.

Spinning the chain off into a separately listed company is also a possibility, according to insiders.

A full-blown auction of Boots, which will probably get under way in the spring, will be among the most significant deals involving a high street chain for many years.

The UK arm, which is among the country’s biggest private sector employers, is run by Sebastian James, the former Dixons Carphone chief executive.

Mr James has presided over a period of renewed investment in the business following a period in which its stores were criticised for failing to modernise.

Valuing Boots is a complicated process given the changing nature of consumer behaviour and its predominantly rented store estate, with many shops tied to long leases, but analysts said that a price of between £5bn and £6bn was realistic.

For Stefano Pessina, the WBA chairman, a decision to sell Boots would mark the final chapter of his involvement with one of Britain’s best-known companies.

The Italian octogenarian engineered the merger of Boots and Alliance Unichem, a drug wholesaler, in 2006, with the buyout firm KKR acquiring the combined group in an £11bn deal the following year.

In 2012, Walgreens acquired a 45% stake in Alliance Boots, completing its buyout of the business two years later.

Mr Pessina and his partner, Ornella Barra, the group’s chief operating officer for its international businesses, have been mainstays with the company since the original Boots merger.

Like many retailers, Boots has had a turbulent pandemic, announcing 4,000 job cuts in 2020 as a consequence of a restructuring of its Nottingham head office and store management teams.

It has also been embroiled in rows with landlords about delayed rent payments.

Shortly before the pandemic, Boots earmarked about 200 of its UK stores for closure, a reflection of changing shopping habits.

The chain’s heritage dates back to John Boot opening a herbal remedies store in Nottingham in 1849.

It opened its 1,000th UK store in 1933.

Bain Capital and CVC declined to comment.

Source: Sky News

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