What’s this? The prospect of another bank rights issue on the horizon?
JPM analysts Francesca Tondi and Erica Noda seem to think so. Only this time it would come from a new bank. One formed from a merger of Commerzbank and Dresdner.
In a note examining the details they write (emphasis ours):
We believe that replenishing the capital base of a potential new group should be management’s primary concern and to this end we have added €2bln worth of capital measures which we think would ensure that core Tier 1 ratio of the assumed new entity would only fall to 5.7% (from Commerz stand-alone 6% at Q208). This €2bln could be raised either through a rights issue or through convertible issuance, for which CBK has already received approval by its EGMs (see Appendix II).
Note that our capital calculation includes an assumed €1.5bln benefit/capital gain deriving from the sale of some stakes, although we admit we have no exact details of their book value.
We would prefer capital of the new entity to remain close to 6%, which we calculate would require a further €1bln of capital issuance with a corresponding 4-5% negative impact on EPS. Note that for each €1bln of share capital issue, we estimate a 4-5% impact on EPS.
Speculation about a little consolidation in the sclerotic German banking sector has been around for a few months now. Commerz and Dresdner have been in talks since the middle of the Summer.
JPM’s analysts think a Commerz/Dresdner is certainly the most attractive tie-up in play. The outside option - rumoured for some time - would be a Commerz/Postbank deal. CBK would struggle to find the financial engineering to make a Postbank deal work, note JPM.
JPM values Dresdner at €9bn, with €2.6bn of synergies that could be capitalised.
For a likely CBK deal, then, half the proceeds would be paid by new shares, as Commerzbank can’t afford an all-cash deal and all-paper’s too dilutive. Importantly, notes JPM, Commerzbank has already secured permission from various EGMs to issue new capital for up to 635.3m shares.
Here’s a more detailed breakdown of the - hypothetical - deal financing (Note- the Commerz asset sales involve Cominvest, and CBK’s large industrial portfolio):
Related links
Commerzbank heads race to buy Dresdner - FT
