Commerzbank Drops Most Since 2002 After Dresdner Deal (Update1)

By Aaron Kirchfeld and Oliver Suess

Sept. 1 (Bloomberg) -- Commerzbank AG dropped the most in almost six years in Frankfurt trading after agreeing to buy Allianz SE's Dresdner Bank for 9.8 billion euros ($14.4 billion) in the biggest financial-services takeover in Europe this year.

Commerzbank fell 10 percent, the biggest drop since October 2002, after analysts said the offer price exceeded investors' estimates. Dresdner will be acquired in two steps, with Commerzbank purchasing 60.2 percent with cash and stock and then the remainder by the end of 2009, the companies said yesterday.

The acquisition doubles Commerzbank's German retail clients to about 11 million, surpassing Deutsche Bank AG's 9.7 million. For Munich-based Allianz, Europe's largest insurer, the sale unwinds the 23.5 billion-euro purchase of Dresdner, which has dragged on the company's profit and stock. The insurer agreed to cover as much as 975 million euros of potential losses from assets held by Dresdner's securities unit.

For Allianz, ``the Dresdner problem is finally nearing a solution,'' said Ernst Konrad, who helps oversee about $35 billion as head of equities at BayernInvest in Munich, including Allianz and Commerzbank shares. ``With this acquisition, Commerzbank creates the clear number two in the German banking landscape.''

The purchase price amounts to 1.1 times Dresdner's book value, more than the 1 times book, or less, that ``investors had been hoping for,'' Citigroup Inc. analysts led by Jeremy Sigee wrote in a note to clients today.

Job Cuts

``Nevertheless, the terms should still be financially attractive for Commerzbank,'' the analysts said. Commerzbank fell 2.05 euros to 18.04 euros in Frankfurt trading.

Commerzbank Chief Executive Officer Martin Blessing took over in May from Klaus-Peter Mueller, who revived profit by scaling back investment banking, cutting jobs and focusing on consumer banking and lending to mid-sized German companies. The bank has reported four straight years of profit growth.

Commerzbank said it plans to eliminate about 9,000 jobs from the combined workforce of 67,000, mostly through voluntary measures. Positions will be shed in areas including investment banking, back office and control. There will be no firings before the end of 2011, the company said. Commerzbank will eventually drop the 136-year-old Dresdner brand, Blessing said at a press conference today.

Frankfurt-based Commerzbank will help pay for Dresdner by transferring its Cominvest asset management unit, valued at about 700 million euros, to Allianz.

Price `Relativity High'

The purchase price is ``relatively high, in particular if taking into account the sale of Cominvest for a relatively modest price,'' Andreas Weese, a Munich-based analyst at UniCredit SpA who has a ``buy'' rating on Allianz, wrote in a note to clients.

Commerzbank's capital increase to finance the takeover as well as risks related to Dresdner's asset-backed securities will weigh on the bank's stock, analysts at Lehman Brothers Holdings Inc. said in a note to investors today.

The bank expects reorganization costs of 2 billion euros and cost savings of about 5 billion euros, as it reduces the number of branches at the combined company by 22 percent to 1,200. Frankfurt-based Deutsche Bank, by comparison, has almost 1,000 branches in Germany. The takeover should boost earnings per share starting in 2011, Commerzbank said.

``We are taking advantage of a unique opportunity to make Commerzbank the leading bank for private and corporate customers in Germany,'' Blessing, 45, said in yesterday's statement.

Cost Cuts

About 50 percent of the cost savings will come from personnel expenses, Commerzbank said in a presentation on its Web site today. The bank is targeting a ``mid-term'' return on equity after tax of at least 15 percent. The Tier 1 capital ratio, a key measure of solvency, is expected to reach 7 to 8 percent ``for the medium term.''

Credit-default swaps on Commerzbank rose 4 basis points to 86, according to CMA Datavision prices at midday in London. The credit-default swaps contracts are conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality; a decline signals the opposite.

A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.

`Milestone'

Commerzbank was advised by Credit Suisse Group AG, JPMorgan, KPMG LLP and Mediobanca SpA. The takeover needs to be approved by regulators.

Allianz CEO Michael Diekmann, 53, put Frankfurt-based Dresdner up for sale this year after subprime-related losses at the Dresdner Kleinwort securities unit eroded profit. Dresdner posted its fourth straight quarterly loss on Aug. 7, following writedowns at the investment bank. Allianz rose 4 cents to 114.14 euros in Frankfurt trading.

``This transaction is a milestone for banking consolidation in Germany and strengthens the German economy,'' Diekmann said in yesterday's statement. The transaction gives Allianz a ``powerful distribution network'' for its insurance products.

The combined bank will offer Allianz insurance under an exclusive sales agreement, the companies said. An existing cooperation with Assicurazioni Generali SpA, Italy's biggest insurer, won't be renewed when it expires in 2010, they added. ``Bancassurance volumes'' are expected to more than double by 2011, Allianz said in an analyst presentation on its Web site.

German Takeovers

The acquisition is the third banking takeover in Germany during the past two months as rivals vie for a larger slice of the nation's fragmented consumer market, which remains dominated by state-owned lenders.

Citigroup Inc. announced on July 11 the sale of its German consumer unit to France's Credit Mutuel Group for 4.9 billion euros in cash. Lone Star Funds, the Dallas-based private equity firm, agreed to buy IKB Deutsche Industriebank AG, the first German subprime casualty, on Aug. 21.

Takeovers will shake up financial services in a market where ``tooth-and-claw'' competition has sapped profitability, Citigroup analysts said in a February report.

The nation's five biggest banks -- Deutsche Bank, Commerzbank, Dresdner, HVB Group and Deutsche Postbank AG -- control about 11 percent of savings deposits, compared with 51 percent at Germany's savings banks and 30 percent at cooperative lenders, according to the German association of private banks.

No. 2 by Assets

Commerzbank and Dresdner together have about 1.1 trillion euros in assets, compared with Deutsche Bank's 2 trillion euros. Deutsche Bank CEO Josef Ackermann has said he would consider acquisitions to boost consumer banking and has expressed interest in Postbank.

Deutsche Post AG, Europe's biggest postal service, reiterated on Aug. 19 that it's still holding talks with ``various potential partners'' about a possible sale of Postbank, which has 14.5 million customers and 850 branches.

Mueller, Commerzbank's supervisory board chairman, said in an interview a takeover of Postbank ``isn't a topic anymore.'' Commerzbank and Allianz had previously considered pursuing a takeover of Bonn-based Postbank after the Dresdner sale.

As part of the Dresdner takeover, Commerzbank agreed to cover the first 275 million euros of potential losses on certain asset-backed securities and Allianz agreed to cover the next 975 million euros of losses, the insurer said in the statement. Dresdner's investment banking activities ``will be partially reduced,'' Allianz said, without elaborating.

Two-Step Purchase

Commerzbank will complete the first stage of the purchase of Dresdner by the start of 2009, paying Allianz 164 million new shares, or an 18.4 percent stake in the bank. In addition to the 3.4 billion euros worth of shares, Commerzbank will pay 2.5 billion euros in cash, including the funds for potential losses on asset-backed securities.

In the second step, Allianz will sell the remaining Dresdner stake to Commerzbank in return for new shares stemming from a capital increase. ``For this purpose an extraordinary general meeting is planned for the beginning of 2009,'' Commerzbank said.

In the end, Allianz will have a stake of almost 30 percent in the combined Commerzbank-Dresdner, making it the largest shareholder. The final size of the stake depends on the exchange ratio of Commerzbank-Dresdner shares.

``The deal will be very good for Allianz if they really won't have to guarantee more than 975 million euros of Dresdner's ABS risks,'' said Konrad Becker, an analyst at Merck Finck & Co. in Munich, who recommends holding Allianz and Commerzbank shares.

Fewer Risks

Allianz will keep Dresdner's Oldenburgische Landesbank AG unit. Dresdner owns 64.2 percent in the Oldenburg-based bank, while private investors own 10.5 percent and OLB- Beteiligungsgesellschaft mbH holds the remainder.

Allianz was advised by Goldman Sachs Group Inc., Shearman Sterling LLP and Ernst & Young. Leonardo & Co. will give a fairness opinion for Allianz and Rothschild for Dresdner Bank, Allianz said.

Allianz bought Dresdner in 2001, in its biggest acquisition, with the aim of selling more insurance products through bank branches. Mounting loan losses at Dresdner and falling stock markets led to the insurer's first annual loss since World War II in 2002.

The insurer has fallen about 61 percent in Frankfurt trading since the Dresdner acquisition was announced on April 1, 2001, more than the 49 percent drop in the Bloomberg Europe 500 Insurance Index.

Allianz has cut more than 18,000 jobs at Dresdner, or about 40 percent of the workforce, and shed about $48 billion of bad loans to revive profit at the bank.

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net; Oliver Suess in Munich at osuess@bloomberg.net.

Last Updated: September 1, 2008 16:41 EDT

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