VIPsight - 1st Edition 2022

COMPANIES

Commerzbank AG: An extraordinary ordinary Bank

There are companies whose results are shaped by a continuous stream of so-called extraordinary results. The topics may be different from one financial statement to the next, but the extraordinary effect on earnings is not. For outsiders, it is seldom foreseeable which other skeletons are still lying there in the basement and when this regular flow of extraordinary burdens will end.

The equity market reacts to this with a clear message. The combination of management quality and the estimated volume of corrections required to clean the balance sheet is reflected in the market valuation of the shares. Typically, the equity of weak companies is only valued to the book value, and in some cases, the quotations are even lower. German banks are experts in this field. Currently, the Commerzbank-share is trading at approx. 9 EUR, which is significantly less than half of the equity per share. In other words: Shareholders assume that more than half of the equity is lost.

This does not mean that this capital has to be written off already because technically it is still there – just not economically anymore. In addition, third parties can only estimate the extent of the disaster. The Bank´s extensive risk reports do not change the picture. Modern risk analyzes did not even help Commerzbank when it took over Dresdner Bank. At the time there was no reliable basis for a real risk assessment for large parts of the investment banking. From a risk point of view, one should not even have put a zero here, while the branch business was already facing a massive downsizing need. Common sense said no, and so did many shareholders.

In such a situation, why does a bank nevertheless decide to take over a competitor with a difficult market position, that is already badly hit? Shareholders who sold their shares at the time can consider themselves lucky. What is more, since the acquisition of Dresdner Bank the market has been treated to a steady stream of extraordinary charges and reassuring statements from management. Allegations of misconduct in dubious tax transactions are a good example. VIP had already inquired about this at the AGM 2016. The company's response was reassuring. In essence, there was nothing to blame at Commerzbank, while the problematic activities of Dresdner Bank were probably insignificant. It´s nice to have a good night´s sleep. Only a few days after the AGM, it became publicly known that PWC had also uncovered transactions at Commerzbank.

Perhaps the Board of Directors of Commerzbank could have known this because the auditing company had been mandated to examine the relevant events long beforehand. And if the Board of Directors had listened carefully, they might have recognized the need to act elsewhere earlier. At the same AGM, VIP critically questioned the level of provisions set aside for risks from foreign currency financings in Poland. Here, too, the bank believed that everything was in good order thanks to appropriate precautions. That was it, until the fourth quarter of 2021. In January 2022, the bank admitted that additional provisions on foreign currency loans in Poland of 436 EUR Mio. had to be set aside. This is an extraordinary event if you haven´t looked too closely at these risks in the meantime.

Does anyone remember what the minimum professional requirements for a bank´s director are?

LEONIE AG: When it rains, it pours

Some companies have to struggle particularly hard in the current market environment. One of them is LEONIE. If over time, significant risks become manageable and the prospects appear more positive, nasty surprises hit particularly hard.

On 18 January 2022, LEONIE informed that as part of investigations by the German Federal Cartel Office various cable manufacturers and other industry-related companies, searches were also carried out at LEONIE Group sites. The reasons for the investigations are suspicions that cable manufacturers could have coordinated the calculation of industry-standard metal surcharges in Germany.

According to the announcement, LEONIE is cooperating with the authorities and will investigate the allegations. Investors appreciate this approach since it might help to obtain more clarification and speed up the investigation at a time when it is otherwise difficult for the company to publish more reliable information at this point in time.

Adler Group S.A.: You can do everything right, and yet it doesn´t want to fit

The road to becoming the fourth largest listed residential real estate company in Europe seems to be further than Adler thought. On its way to reaching this goal, apart from sufficient growth, Adler needs to overcome one particular hurdle: distrust of shareholders. It may be true that the current share price turbulence can be traced back to one market participant. That in itself wouldn´t be a bad thing, but that many others take these doubts seriously is distressing.

So the obvious answer is not to sell assets, but to create transparency. Unfortunately, Adler has so far acted rather cautiously in this area. The most recent setback was the information that due to the ongoing forensic special investigation on the allegations made by Viceroy Research Report, it is highly unlikely that the audit of the consolidated financial statements can be concluded timely enough to allow for a publication of the audited financial statements by 31 March 2022. This doesn´t bode well for the schedule of the ordinary AGM.

Maybe someone will think of the shareholders and organize an extraordinary general meeting with the main object of informing the shareholders? It will probably take a long time before that happens. But at least there is a surprising glimmer of salvation far behind on the horizon. Bafin seems to conduct its investigation. That should be very welcome in Luxembourg, as long as it gives a clean test result!

Siltronic AG: Termination Fee earned

This had already become an apparent event to outsiders in the past few weeks: GlobalWafers public tender offer would probably fail due to regulatory hurdles. And that´s how it happened.

By the end of January 2022, the deadline to obtain the foreign investment approvals for the completion of the public tender offer by GlobalWafers GmbH has expired and up to then, GlobalWafers did not obtain a certificate of non-objection from the German Federal Ministry for Economic Affairs and Climate Action. Therefore, the conditions for the completion of the tender offer have not been fulfilled. Accordingly, the tender offer will not be closed but has expired.

It looks like this transaction fell victim to the growing political awareness of the strategic importance of this industry. This gain in knowledge did not come for free. The business combination agreement between GlobalWafers and Siltronic foresees that GlobalWafers shall pay a termination fee of 50 Mio. EUR to Siltronic in the event of failure to obtain required regulatory approvals within the applicable deadlines.