VIPsight - 1st Edition 2023
COMPANIES
Deutsche Börse AG: Testing the Limits
Good relationships with the supervisory authorities are particularly important for financial institutions. After all, financial institutions cannot operate without official approval. What is more, good standing with the regulators is important for the customers´ trust in the solidity of their business?
These considerations are probably not new for Deutsche Börse either. The current exchange of blows between the Clearstream subsidiary and BaFin is therefore all the more surprising. As early as April 2022, an increase in the underlying equity and the implementation of organizational changes were ordered. This was done following a special audit which revealed that the correctness of the business organization within the meaning of Section 25a (1) KWG in conjunction with Section 25h KWG at Clearstream was not given in all audited areas.
Something like this can happen. Correct mistakes, and move on? Not so much at Clearstream. Here, it looks like they place more value on a sustained stream of bad news. In January 2023, BaFin had to announce that it ordered Clearstream to ensure proper business organization under Section 25a (2) sentence 2 of the KWG and Section 45b (1) KWG. BaFin has also ordered Clearstream to report regularly to BaFin and the Deutsche Bundesbank on the progress made in remedying the deficiencies.
Perhaps the time has come to involve shareholders in this conversation and to explain what is (not?) happening here.
Hamburger Hafen und Logistik AG: Translation Help at the Terminal
COSCO Shipping Ports Ltd. (COSCO) is a major customer of Hamburger Hafen und Logistik AG (HHLA). Hence, it did not come as a surprise when the companies announced plans to intensify this partnership, including a minority stake in HHLA Container Terminal Tollerort. Given the strategic importance of port facilities, the German Ministry for Economic Affairs and Climate Action was also interested in this process. After all, the relevant question is why was such participation necessary at all if the parties only wanted to deepen the cooperation.
The outcome of this discussion was concrete requirements for COSCO and HHLA if they wanted to proceed with the planned stake in the Terminal. The volume of the maximum investment was limited to 25%, and all strategic decisions shall continue to be made by HHLA. COSCO will not receive any exclusive rights at the Terminal, which is to remain open to container volumes from all customers. COSCO also will not get access to strategic know-how, while IT and sales data remain solely at HHLA´s responsibility.
This looks like a resilient foundation for the terms of the planned minority stake. However, it raises the original question again, this time from COSCO´s point of view. Leaving aside potential dividend income, what other benefits does the investment offer to COSCO? Perhaps this question has also been asked in CHINA. Hence, it didn´t come as a surprise when in early January COSCO made a mandatory announcement in Hong Kong that as of January 6th, 2023 the parties are still considering and discussing the with the Ministry to the conditions, and the non-objection certificate to be issued by the Ministry has not been issued yet.
Does this sound like an easy task to solve? At least HHLA still seems to think so. Given this optimism, one can only wish for speedy success.
SYNLAB AG: In Case of Doubt, send the Message out
Many companies wait until they can no longer avoid publishing bad news. Sometimes the problems solve themselves without any action on your part. And if this doesn´t happen, one at least had a little peace to prepare oneself very carefully for questions from the media and investor audience. Holding back the news is convenient, but it comes at a price. Investors learn quickly when the news comes very late. That leads to mistrust of the investor relations department, but also of the company and its business practice as a whole.
Fortunately, there are good examples of how to do it better, too. A recent SYNLAB release fits that bill. The company the Portuguese Competition Authority has initiated proceedings against, inter alia, two Portuguese entities of SYNLAB Group and has associated SYNLAB AG with the proceedings regarding potential violations of competition law in Portugal. The Authority has formally notified the respective objections. These concern the operations in the Portuguese market for laboratory diagnostics between 2016 and March 2022. SYNLAB will review the objections carefully and decide upon the next steps afterward. The estimated outcome of the proceedings, including the risk of a potential penalty being imposed on SYNLAB, cannot be determined before the completion of this review and progress in the proceedings.
Indeed, this is bad news for the shareholders. But it should be noted that the company decided to inform about the proceedings although it is not yet clear what the consequences of the process will be. Someone did their homework here.
Uniper SE: Time to say Goodbye
If there was one company in Germany that benefited massively from political windfall profits, then it must be Uniper. But political windfall profits also come at a price. This also includes the risk of a change in the political situation that the company cannot control.
Putin´s hope of buying consent to wipe Ukraine off the map with cheap gas was dashed, as was Uniper´s business model. As a consequence, the company and its shareholders were suffering losses that could no longer be sustained. This resulted in a call for help to the state which could not resist this request given the company´s economic importance.
The result is a short message informing the shareholders that the company´s boards resolved on a capital increase using the Authorized Capital 2022 created by the general meeting on December 19th, 2022. The share capital shall be increased via the issue of new shares. Only the Federal Republic of Germany or a person specified in Section 29 (6) EnSiG is permitted to subscribe for the new shares. Time to say goodbye for the ordinary shareholder!
Rheinmetall AG: Supplied with 100% unreliability Guarantee
The Russian attack on Ukraine caused a remarkable change of mood in Germany in favor of armaments companies. Rheinmetall also benefited from this. No wonder, that the share price has soared since. As a result, many shareholders sat back and relaxed in the expectation of a pleasant Christmas.
This pleasant situation was severely disturbed from November 18th. On that day, a drastic fall in the share price began, which deepened the following day. On December 19, shareholders also learned the reason for the share price disaster. The Ministry of Defense had presented a briefing on hardware and software problems with the Rheinmetall´s Puma tanks to the German parliament.
Doesn´t that look like a tough pre-Christmas work program for the German financial regulator BaFin?
Linde plc: Are European Standards too high for Linde?
Linde plc proposed an intercompany reorganization that would result in the delisting of Linde plc shares from the Frankfurt Stock Exchange. In this context, a new holding company would be created through an Irish scheme of arrangement and domestic Irish merger. Shareholders would receive one share of the new holding company to be listed on the New York Stock Exchange.
The message addresses the background to this decision only indirectly. The management and board determined that shareholders of Linde plc have become negatively impacted by various factors associated with the stock being dual listed in the United States and Germany. The key clou can be found here:
“While the dual listing structure has served us well since interception, it has constrained our stock valuation through European restrictions in addition to incremental complexity.”
Some observers took this statement as a reference to the different multiples in major European and American Indices. But this idea is nonsense. The American indices enjoy a higher multiple due the large high-tech component. Linde is not set to become the next Apple, and one should not expect the Linde share to jump to a new level for this reason. What is different, though, are the corporate governance rules, and the regulations of the stock exchanges. Some of the European regulations are obviously more shareholder friendly. Some American regulations are more management friendly.
So it´s the fine print that count. Investors need to find out which essential cost-incurring regulations are no longer applicable when a stock market listing is abandoned and which investor rights are lost in the process. And finally, it is important to quantify the one-time cost of withdrawing from the American or European stock exchanges, and the risks of implementing a decision. Why is it that Linde has not yet announced these minimum information requirements for a decision on the proposal?
Leoni AG: A reliable Bad Luck Raven
There are some companies that seem to attract misfortune. Unfortunately, Leoni also belongs to this group. The qualification gives a sympathy bonus. But that doesn´t count on the capital market. But at least we can count the company among the regular guests in this category.
In mid-December it was time for an update again. This time, Leoni informed that all closing conditions for the closing of the sale and purchase agreement entered on May 23rd, 2022 with STARK Corporation on the sale of the Business Group Automotive Cable Solutions have been timely fulfilled and that the closing was scheduled to occur shortly. However, STARK demanded on December 13th significant amendments to the purchase agreement. Despite willingness to compromise on the side of Leoni, STARK refuses to agree and will not perform the closing according to Leoni. From Leoni`s perspective, no grounds for non-performance of the closing exist, meaning that STARK is in breach of the contract.
From the outsider view, this looks like a typical poker game. The transaction is linked to the refinancing plan, which is the basis for the financing of the Leoni Group until the end of 2025. For this purpose, Leoni has already signed a comprehensive contractual documentation of the refinancing plan with its syndicate banks and borrower´s note holders on the basis of the agreement in principle reached in July 2022. An essential prerequisite for its implementation, however, is a partial repayment of financial liabilities with proceeds from the sale of the Automotive Cable Solutions Group. As a result of the non-performance of the contract by STARK, the refinancing plan cannot be implemented for the time being.
The syndicate banks have already declared (subject to customary approval processes) that they will temporarily extend the credit facilities maturing on December 31st, and Leonie indicated that it will take all measures to enforce its rights against STARK.
Voilá, the classic legal question: Who has more to lose if it takes longer?
flatexDEGIRO AG: Do they understand what they are doing there?
The general definition of a mistake is doing what you wouldn’t have done if you had realized what you were doing. flatexDEGIRO showed its shareholders how this works in its corporate announcement on December 3rd. At some point in November, the company learned of the results of a BaFin audit. Apparently, the importance of this information was only understood sometime later. The obtuseness is surprising.
Earlier in the year, BaFin has conducted a special audit at flatexDEGIRO in accordance with section 44 of the KWG (Kreditwesengesetz), identifying shortcomings in business practices and corporate governance. As a result of the audit, BaFin will, among other things, impose flatexDEGIRO to ensure an appropriate business organization, and has issued temporary capital surcharges.
flatexDEGIRO claims that it has immediately initiated various measures to comply with the regulatory requirements, within a specified timeframe. The corporate news dated December 3rd seems to be the first outcome of these initiatives. As an outsider, one can only speculate about the status of the corporate governance at the company. Investors are warned to not take the processing time for the report on the BaFin examination as a proxy in this respect. Although probably ad hoc relevant, the publication of the audit results came a bit late, and the focus was not really on the content of the findings from the audit. However, the message also explained changes to the executive board. Let´s hope that these will help to improve the corporate governance, including a corporate communication suitable for the capital market.