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VIPsight - 4th Quarter 2020 <click here>

VIPsight - News

 

November 2020

Deutsche Börse AG:  Invest in Corporate Governance

Deutsche Börse announced that it will acquire a majority share of approximately 80% in Institutional Shareholder Services Inc. (ISS). The transaction values ISS at 2,275m USD on a cash and debt-free basis. Genstar Capital LLC and the current management of ISS will continue to hold a stake of approximately 20% of ISS. The transaction is expected to close in the first half of 2021, subject to customary closing conditions and regulatory approvals. Deutsche Börse plans to finance the acquisition with a debt component of 1 bn EUR and cash.

In 2020, ISS is expected to generate net revenue of more than 280m USD (Pro-forma IFRS) and an adjusted EBITDA margin of approx. 35% (pre-transaction effects). The net revenue of ISS is expected to grow organically at a rate of more than 5% p.a. on average until 2023. While this looks expensive, the real incentive for this transaction is the expectation that the partnership with a leading corporate governance, ESG, data, and analytics provider shall help to generate further growth opportunities for Deutsche Börse Group in ESG-based investing. Both businesses are regarded as highly complementary and offer the potential for revenue synergies, which are expected to result in 15m EUR additional EBITDA by 2023.

Considering the strategic potential the transaction looks like a sound investment. But a lot depends on the implementation of the transaction, i.e. the integration into Deutsche Börse Group. ISS is an important participant in the corporate governance world. It reached this position by strictly adhering to certain business principles, including a clear, transparent, and unbiased business execution. As is stated in the Code of Ethics (version November 2020), ISS must always serve the best interest of its clients and not subordinate its client´s interest to its own. This fundamental business principle may also set limits for the scope of the integration and the realization of potential synergies. The parties announced already that in the time following the closing ISS shall continue to operate with the same editorial independence in its data and research organization that is in place today, while the current executive leadership team is expected to remain in place after the closing. Good, then let´s place a bet on a smooth process.

 

KION Group AG: How to remove COVID-Effects from the Balance Sheet

The COVID pandemic has left deep wounds on the capital markets. In many cases, government support helped to avoid the worst. But that means nothing else than a solution for the moment. These interim solutions are nothing more than a postponement of a solution, which is associated with costs and restrictions.

Only a few investors and companies are currently asking themselves how this money can be repaid. KION is one of these forward-looking companies. On November 18^th, 2020, the company announced the intention to increase its share capital through the issue of 13,108,647 new shares by way of a rights issue against cash contributions, thereby using a large part of its authorized capital. The subscription ratio shall be 1:9, and the total number of shares after the increase would be 131,198,647. The subscription price is expected to be determined at the beginning of the subscription period, which runs from November 20 through December 3, 2020. The issue proceeds are intended to be used to reduce the level of debt and to provide comprehensive support for growth in the coming years. The planned debt measures include the termination of the syndicated revolving credit facility with a group of banks and KfW, which had been agreed upon in May 2020 to bridge the effects of the pandemic. The growth initiatives include expansion in China, new product developments, the focus on software solutions, and continued efforts to improve performance.

Hmm, the market reacted negatively on this announcement. Has anyone ever thought of how more severely affected companies can remove the COVID patches from their balance sheet?

 

Deutsche Lufthansa AG: The Finance Division gets a Pilot

Demanding circumstances require special measures. This seems to be the motto of Lufthansa´s supervisory board when it made its decision to appoint a new finance director. Remco Steenbergen is the new member of the Executive Board and will assume the position of CFO on January 1^st, 2021. Until recently Mr. Steenbergen was the CFO of the Swiss Barry Callebaut Group. Following the resignation of his predecessor, the CEO Carsten Spohr took over the responsibilities of the CFO. With the appointment of the new CFO, the Finance Division will be re-established and shall include controlling and risk management, corporate finance, accounting and balance sheets, taxes, purchasing, and mergers & acquisitions.

It is reassuring that Lufthansa has a CFO again, who appreciates challenges. Amidst the background of the COVID-restrictions, the airline´s business has largely collapsed and improvement is not in sight. It is as simple as that: the survival of the company depends on the successful work of the finance division. The company wouldn´t be where it is today without this work, but it is reassuring to investors that a CFO takes control again.

 

Wirecard AG: This Company is beyond Payments

Viewed from a professional perspective, Wirecard certainly deserves many awards. The company is undoubtedly a prime example of failed corporate governance and the failure of supervisory authorities. Therefore it is no wonder that, in addition to the processing and digesting of what happened, the blame game is also running at full speed. This is also the reason why the former CEO of Wirecard, Markus Braun, won a day trip to the German Bundestag.

The only thing unfortunate about his trip out of the penal institution is the timing. After all, Wirecards´s creditor´s meeting is taking place at the same time in Munich´s Löwenbrauhaus. The total debt of Wirecard is expected to exceed 3bn EUR, while the around 11,500 creditors even registered claims of over 12bn EUR.

However, the creditors will probably not expect a high quota on these claims, since the proceeds from the sale of assets to date have been low. Nonetheless, there is an interesting feature of this process many shareholders are not aware of. In the event of bankruptcy, shareholders´ assets are usually lost. But here we are talking about fraud. This means that damage claims from shareholders are also possible. Hopefully, all institutional investors realized this chance to recover a part of the money lost. Because of the critical attention paid to the events surrounding Wirecard, I am sure that BaFin will ask questions about it during the next routine audit, or maybe not, who can already know that today?

 

more - VIPsight - 4th Quarter 2020 <click here>

 

July 2020

Commerzbank AG: Everything has it´s Time

Wirecard currently dominates the news. But somewhere in the past few days, Commerzbank, which recently dropped out of the DAX, sent a call for help. It is not clear to the outside observer whether the announcement made by the bank on July 3^rd was this call, or perhaps already the previous letter from Cerberus pushing for a change.

Many investors were shocked when they heard on July 3^rd that the Chairman of the Board of Managing Directors and the Chairman of the Supervisory Board would step down. Martin Zielke, the Chairman of the Board of Managing Directors, offered to resign early on the basis of mutual termination of his Board membership if such resignation is in the interest of Commerzbank. On July 8^th, the Supervisory Board of Commerzbank has agreed to the mutual termination of the appointment and contract. Mr. Zielke did agree to continue to perform his duties until a successor has been appointed. He will step down from his office at the latest on 31^st December 2020. Stefan Schmittmann, the Chairman of the Supervisory Board, has announced to resign from office with effect from August 3^rd, 2020.

The timing of the letter from Cerberus and the bank´s subsequent publications probably came as a surprise to most observers, the content, however, less so. Since the strategically and economically disadvantageous takeover of Dresdner Bank, Commerzbank has taken a leisurely path under the care of the German government. A small step here, a little correction there, and from time to time a rebranding of the same thing. The results were a disaster. A course correction was urgently needed. And as it turned out later, the German Finance Ministry maintained close contacts with Cerberus.  But the question remains, why only now and not much earlier?

 

Continental AG: Is this Braking or the Pause Button?

With carefully selected bits and pieces of information and advice, Continental achieved to get a fair amount of attention for the planned spin-off of its powertrain business Vitesco Technologies. But investors who want to buy the stock now have to wait even longer, since Continental´s Executive Board decided in late April that the planned listing of the powertrain business shall no longer take place this year due to ongoing economic uncertainty. The idea behind this decision is that the plans for Vitesco Technologies to become independent thus can be implemented with greater flexibility in response to market conditions.

The Board also decided to continue preparing the powertrain business for the intended spin-off at a later point in time, thus ensuring that this step can be implemented with the shortest possible lead-in time and great flexibility once the market conditions change.

Consequently, the company no longer pursued the approval of this years´ AGM regarding the planned spin-off. While many shareholders might not have missed this item on the agenda, other COVID-related topics had a direct impact, such as the lowering of the proposed dividend to 3.0 (initial proposal: 4.0) EUR per share and the information about a salary waiver by the Executive Board members and for executives in March 2020. For the members of the Board, the waiver resulted in a reduction of the fix salary for the Months from April through July by 10 percent. This initiative was made in solidarity with employees who have been affected by short-time work and other curtailments.

 

K+S AG: Adjustment of the Dividend Proposal to maintain the Eligibility for KfW Support

The handling of the effects of the COVID pandemics also places new demands on CFOs and shareholders. A good example is K+S AG, which had to adjust the dividend proposal for 2019 to the legal minimum dividend of 0.04 EUR per share. The previous dividend proposal was 0.15 EUR per share. The decision to adjust the proposal was made to maintain eligibility for a KfW state-secured loan.

At first glance, this is a good and convincing argument. The effects of the COVID pandemic are obvious, and a cautious approach is appropriate. This applies all the more when looking at the balance sheet ratios. And the continuing uncertainty on the capital and financial markets about the economic consequences of the crisis is probably not helpful for the planned sale of the American salt business either. But there is light to see at the end of the tunnel. At the AGM, the CFO confirmed that the sales process is going well so far and the company still is expecting to sign a contract in 2020, while the closing will take more time. Shareholders still have to hold their breath for a while.

 

April 2020

Deutsche Lufthansa AG: First restructuring Package decided, what´s next on the Agenda?

Although the COVID-19 crisis has been going on for a while, strategic decisions for the time after that are seldom heard yet. This is probably because so many companies are still busy communicating postponements of AGMS, profit warnings, and dividend cancellations.

No wonder that only a few companies think about tomorrow in this situation. A positive example is Lufthansa. The airline industry had a particularly heavy blow from this crisis, and it is still open if any airline can survive in 2020 without government help.

But Lufthansa is already one step further with the recent decision on a first restructuring package. The company expects a significant decline in air travel for the period after the crisis, while a return to pre-crisis levels is not expected in the foreseeable future. Based on this assumption, Lufthansa decided to reduce the capacity of flight operations and administration long term. Parts of the fleet will be permanently decommissioned, while other planes will be withdrawn from short-haul operations. Further reductions apply to Lufthansa Cityline and Eurowings, while the already initiated restructuring plans at Austrian Airlines and Brussels Airlines will be further intensified, including steps to reduce the fleets, while SWISS International Airlines is expected to take similar initiatives.

The flight operations of Germanwings will be discontinued to speed up the already planned bundling of all flights of the Eurowing Group in one unit. Also, the Lufthansa Group airlines have already terminated almost all wet-lease agreements with other airlines. There was also a clear message for the employees: The aim is to offer as many people as possible continued employment within the Lufthansa Group. In this respect, talks with unions and workers` councils are to be arranged quickly.

At first glance, Lufthansa´s decision on a first restructuring package as part of the preparations for the time following the crisis comes as a positive surprise. But then again, there are these ongoing rumors of a government bailout. With state money in the accounts, if definitively would become much harder to restructure the business for later times. Could it be that the package may not be aimed at the time after the crisis, but rather serves to prepare for a more substantial step?

 

OSRAM Licht AG / ams AG: No Reason to question the Acquisition Financing

Investors in OSRAM can take a deep breath: No reason to worry about the financing of the takeover attempt. But perhaps the banks involved in this transaction now have a strong interest in the wellbeing of ams also in the long term.

This story started already on January 24^th, 2020, when the extraordinary meeting of shareholders of ams approved a rights issue of up to 1.649 million. The proceeds of this issue should be used to repay a portion of the EUR 4.4 billion acquisition bridge facility for the public offer for OSRAM.

The preparations for the rights issue proceeded as planned. On February 11^th, 2020, ams successfully placed its entire treasure stock of 3.350.688 shares at a price of CHF 44.25 per share with institutional investors. On the same day, the Management Board of ams decided on the terms of the right issue. In the capital increase, 189,869,454 new shares were offered by way of a discounted rights offering at an offer price of CHF 9.20 per share. For each existing ams share, shareholders received one subscription right. Four rights entitled to purchase nine new shares at the offer price during the subscription period, which ended on March 30th, 2020.

On March 19^th, 2020, ams informed the market about the outlook for the public offer and the status of the capital increase. The company expects that the public offer for OSRM will be closed in the second quarter of this year. Also, the capital was proceeding on the terms set out in the prospectus published on March 13, 202, the statement confirmed. Accordingly, the only remaining closing condition relates to the receipt of the required regulatory approvals. This was good news to the OSRAM shareholders, but not so much for the banks, since the rights issue was fully underwritten by a syndicate consisting of the same banks that had also underwritten the fully committed acquisition bridge facility of up to EUR 4.4 billion.

With the completion of the rights exercise period on March 30, 2020, subscription rights for 117,451,512 new shares were exercised, corresponding to 62% of the 189,869,454 offered shares. 15,023,697 of the remaining 72,417,942 shares could be placed with investors at a price of CHF 9.20 in a second step. Accordingly, a total of 132,475,209 shares have been taken up by investors, corresponding to approx. 70% of the 189,869,454 shares offered in the rights issue. The remaining 57,394,245 shares no sit on the books of the syndicate banks according to their underwriting quota.

 

December 2019

Proxinvest publishes its twentieth third report: “Annual General Meetings and shareholder activism – 2019 season”

(Hans-Martin Buhlmann and Jose Ignacio Sanchez Galan after VIP remarks in 2019 Iberdrola AGM)

Restrained General meetings

While the “Place de Paris” (i.e stakeholders on the French listed market) wonders about the potential framework regarding shareholder activism, Proxinvest’s report on General Meetings displays that in fact General Meetings of French companies remain very controlled. In point of fact, 57.6% of voting rights exercised in the 315 General Meetings analyzed by Proxinvest were in the hands of reference shareholders (36% in the CAC 40), explaining why only 0.64% of resolutions were not adopted.

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