Alexander Hendricks, banks analyst at Deutsche Bank, is clearly on message. From a note dispatched to clients on Tuesday:
The deal catapults Commerzbank into new dimensions; it becomes the largest retail and SME bank in Germany. However, it pays a full price for this.
The analyst has slapped a “sell” rating on Comerzbank stock and cut his price target from €22 to €16.50, citing his forecast that its takeover of Dresdner will not be earnings accretive until 2012, while also carrying a high degree of execution risk.
Yes, this is a a “milestone deal in domestic consolidation and deserves accolades for its bravery,” but as far as Mr Hendricks is concerned while it might be strategically attractive, financially it is not compelling.
Commerzbank invests a total of EUR10bn. It computes the present value of synergies at EUR5bn. Hence, the minimum price for Dresdner Bank stand-alone is EUR5bn, some 10x what we believe to be the core profit potential of Dresdner Bank. Assuming Commerzbank shareholders deserve 50% of synergies, the price for Dresdner Bank core jumps to 15x. Also, Commerzbank sells its asset manager cominvest for EUR0.7bn, an attractive deal for the acquirer. Commerzbank shareholders are left with a sizeable execution risk and should only expect EPS accretion from 2012 onwards, not enough for us to encourage investments.
Related links:
Commerzbank: Better to travel than to arrive? – FT Alphaville
For you Dresdner, ze brand is over – FT Alphaville