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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a former global head of equity capital markets at Bank of America and is now a managing director at Seda Experts
When governments divest shares in quoted companies, two objectives reign supreme: maximise taxpayer returns and ensure procedural transparency. The recent sale of Commerzbank shares to UniCredit has failed on both counts, offering a textbook example of how not to create price tension in a capital markets offering.
The €700mn disposal of shares, orchestrated by Germany’s federal finance agency, has ignited a firestorm of recriminations and raised questions about who knew what and when, and why crucial information seemed to fall through the cracks. It also wrongfooted the German government in dealing with UniCredit’s broader strategic ambitions.
A quick recap: on Tuesday last week, the FFA invited a cadre of investment banks to bid on a block of 53mn Commerzbank shares. JPMorgan Chase and Goldman Sachs emerged victorious and re-offered the shares to investors via a fast-track process called an “accelerated bookbuild” where stock is sold quickly without formal marketing. The offer price was €12.48 — less than a 1 per cent discount from the day’s closing price of €12.60.
While pricing block trades isn’t an exact science, the two banks were undoubtedly underwriting at an aggressive level. That is good for the seller but it’s “squeaky bum time” for syndicate bankers until the block is “off the pad” and sold. I experienced it myself as a banker.
But then entered UniCredit, which swooped in later that evening with a reported €13.20-per-share bid for the entire block, scuppering the bookbuild. Combined with a 4.5 per cent stake it had built up with derivatives, that left it in control of 9 per cent of Commerzbank. By the following day, speculation about UniCredit’s strategic intentions had catapulted Commerzbank shares up more than 20 per cent, reaching €15 per share, with further gains following.
The FFA appears to have followed standard protocol for a government-organised bookbuild. And the German government has used this playbook before. The state development bank KfW auctioned off €2bn of Deutsche Post shares in February, followed by €2.5bn of Deutsche Telekom shares in June, both through accelerated bookbuilds. These sales were executed with minimal fuss at tight discounts of just over 2 per cent. The FFA presumably thought a similar process would flush out the highest bids for Commerzbank.
But UniCredit’s swoop raises many questions around the co-ordination and communication within the German government. The Italian bank’s chief executive Andrea Orcel claims that the German government was “well aware” that UniCredit had already amassed a 4.5 per cent stake in Commerzbank.
If true, then the decision to launch a stock market offering defies belief. Strategic buyers such as UniCredit typically pay hefty premiums — often in double-digit percentages — whereas accelerated bookbuilds normally price at a discount to the last quoted price.
The outcome? Germany has forfeited well over €100mn in potential gains on the stake sale that it might have expected to secure from the premium paid by a strategic buyer. It also may find itself strategically outmanoeuvred, with its grip over Commerzbank’s future potentially weakened.
By launching the accelerated bookbuild in this way, Germany painted itself into a corner, with little practical choice but to accept UniCredit’s lowball bid because the alternative was even more unpalatable. The FFA could have refused to allocate UniCredit’s eleventh-hour order, but that would have meant settling for the lower price from institutional investors.
There are also questions over the role of the banks. JPMorgan is reported to have invited UniCredit to make an offer for the block, but it is not clear when the approach was made or who (if anyone) in the German government had authorised the outreach. And once the deal evolved from a capital markets offering to a straight sale, Goldman Sachs resigned from the deal to avoid a conflict of interest with its position as Commerzbank’s long-term strategic adviser.
Goldman Sachs’ withdrawal and UniCredit’s bid price mean that — assuming typical fee arrangements — I calculate JPMorgan might have earned as much as €10mn. This would amount to quite a windfall fee. It’s telling that even though this was a government sale, it’s not yet publicly known what remuneration was paid to JPMorgan.
In short, the sale highlights a troubling trifecta of naïveté, opacity and slipshod execution, leaving German taxpayers financially short-changed and the government strategically outflanked.
