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.

 

 

 

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Buhlmann's Corner

 

Good governance volatile and colourful?

What colour is good corporate governance; is it brown and dirty, blue and interim or - when then, please - green and clean.

What does green electricity actually mean? Is it regeneratively produced energy, that green consumption that has to be replenished by lignite-fired power generation because of demand? What do we think of wind power being used x times green and then being replaced by brown? Simply put, doesn't this look like green-washing?

Quite a few companies claim green governance while distancing themselves at a virtual distance from the owners? Why not schedule an AGM in the summer when the viral activity is weakening, as we have seen in the last two years.

It's kind of like sponsoring Thomas Bach (International Olympic Committee). After fat cat Toyota pulled out of sponsorship, Bach welcomed Japan's Tepco. Tepco operated, among other things, the nuclear reactors that exploded in 2011, is listed on the stock exchange and celebrates its annual general meeting < http://vip-cg.com/hv-agenda.php?l=en&debug=&region=&filter=tepco&andfilter=&fidatum=&fidatum_to=>(link should be preserved") on 29 June 2022 as Tokyo Electric Poweror Corp Holding. This is taxonomy for sportsmen.

In Germany, governance and especially corporate governance are just colourless, just like the bushman (https://en.wikipedia.org/wiki/Marco_Buschmann) moving to the savannah. The crown now lies with the Federal Statistical Office; it has been asked to carry out a study which should "lead to the reduction of bureaucracy and for better regulation". This with such glorious questions as:

"How often did the General Meeting Committee meet each year?"

One of the answers offered, by the way, is: 1,000.

Also very nice and of experience and knowledge equally unclouded:

"What is your function in relation to the General Meeting Committee?:

(multiple answers possible) x Member of the committee

- (Vice) Chairperson of the committee

- Organiser or responsible for finances and present at the meeting  

- Organiser or responsible for finances and not present at the meeting".

One can only hope and pray that these principals and such studies do not find their way to the Ministry of Justice. Maybe the question about the turnover size of the responding company gives hope, here the offered answer frame ends at 50 million € - after that only "rest of world" comes. Then all DAXes should be safe?

Wie war zu Cölln es doch vordem mit Heinzelmännchen so bequem (https://en.wikipedia.org/wiki/Heinzelm%C3%A4nnchen) - when entrepreneurial personalities could do without special rights, not so much because of their academic successes in "Good Corporate Governance" but because of human greatness and genuine farsightedness. Under the aegis of Peter C. von Siemens, multiple voting rights were abolished without replacement on 18 February 1999, agenda item 10. Governance then had contour and colour. Peter von Siemens passed away on 11 December 2021.

 

 

 

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ACTIONS CORNER

 

ADVA Optical Networking SE: Sometimes it all depends on the right Deadline

On the equity market, 1 plus 1 does not always equal 2, even if the economical logic speaks for a measure. A good example of this is the business combination of ADVA and ADTRAN. As early as August 2021, the two companies announced their intention to combine their businesses to form a global, scaled end-to-end fiber networking solutions provider. The combination is expected to expand the product offering and to strengthen the position as a global fiber networking provider with combined revenue of 1.2 Bn USD. According to the announcement, the measure is expected to create significant value for the shareholders of both companies, with approximately 52 Mio. USD in pre-tax annual cost synergies realized within two years post-closing, driven by identified supply chain efficiencies and operating model optimizations.

The companies were combined under a new holding company pursuant to an all-stock exchange offer for all of ADVA´s outstanding shares. Under the terms of the offer, each share could be exchanged for 0.8244 shares in the new holding company. The offer was equivalent to 14.98 USD per ADVA share based on ADTRAN´s 3-month VWAP as of August 27, 2021. This represented a premium of 22%, an equity value of 789 Mio. USD, and an enterprise value of 759 Mio. USD for an implied value of 1.3x LTM revenue. ADTRAN shareholders received shares in the holding company on a one-for-one basis. Assuming a tender of all ADVA shares, ADVA shareholders would have received 46% of the equity of the combined company, while former ADTRAN shareholders would own approximately 54%.

The new holding company Acorn HoldCo published the offer on 12 November 2022. At the time, Acorn had already secured an irrevocable undertaking from the largest shareholder of ADVA, representing 13.7% of the total share capital of ADVA, to tender its shares in connection with the offer. Despite these good start conditions, the minimum acceptance threshold for the offer to acquire all non-par value bearer shares in ADVA had to be lowered from at least 70% to 60% on January 10, 2022, and the acceptance period was extended from 12 January to 26 January.

The bidder informed that as of the end of the initial acceptance period on 26 January 2022, the voluntary public takeover offer had been accepted by more than 60% of all shares of ADVA Optical Networking SE entitled to voting rights existing as of 31 October 2021, thus exceeding the required minimum acceptance threshold.

That was a happy ending for the offer, considering that the total number of shares tendered during the initial acceptance period amounted to 30,715,845 shares, which corresponds to approximately 59.71% of all outstanding ADVA shares as of 30 November 2021.

 

DIC asset AG: Why take everything when half is enough?

The consolidation in the German real estate industry is still running at full speed. A few weeks ago DIC asset added an interesting facet with its launch of a voluntary public partial tender offer of its wholly-owned subsidiary DIC Real Estate Investments GmbH & Co. KGaA to shareholders of VIB Vermögen AG. DIC is offering to purchase up to 6,500,000 shares of VIB from VIB shareholders for a cash consideration of 51.00 EUR per share.

The offer price represents a premium of 34.7% compared to the stock price before the start of share purchases by DIC asset, and approximately 94% compare to the last reported EPRA NTA, respectively. The acceptance period for the offer commenced with the publication of the offer document on 9 February and is expected to expire on 18 March 2022.

DIC asset already owns 11.5% of the VIB shares. The completion of the tender offer is, among other things, subject to the condition that the minimum acceptance rate of 30.0% of all outstanding VIB shares is achieved. DIC had already secured approx. 11.5% of the VIB shares before the publication of the offer, and was thus already the largest known individual shareholder. With the completion of the offer, CIC asset expects to hold around 51% of the VIB shares and to fully consolidate VIB in its consolidated financial statements.

 

alstria office REIT-AG:

Low interest rates and the prospect of real estate price increases make real estate stocks particularly attractive for buyers. This applies in particular to the German market with numerous listed real estate companies.

However, the situation is currently changing at a rapid pace. For example, alstria office REIT-AG informed its shareholders in November 2021 about an investment agreement that it signed with Alexandrite Lake Lux Holdings S.a.r.l., a company controlled by real estate private funds of Brookfield Asset Management, according to which Brookfield shall make a voluntary public takeover offer for all of the outstanding in alstria that it did not own at the time, for 19.5 EUR per share in cash.

The offer was successful. On 12 January 2022, the bidder announced that the total number of shares acquired (including shares acquired by persons acting jointly with the bidder) amounted to 89,904,173, representing 50.5% of the issued share capital of alstria office REIT-AG. These shares and voting rights in alstria are attributed, inter alia, to Brookfield Asset Management Inc. to the effect that, after settlement of the takeover offer, Brookfield owns indirectly more than 50% of the voting rights and the shares of alstria.

This makes the list of real estate stocks with a high market cap a little shorter again. A replacement is provided, however, because alstria will be replaced by Daimler Truck in the M-DAX.

 

Delivery Hero SE: Wellcome to the real World

This was more than just a beautiful dream. Investors loved Delivery Hero – modern, innovative, disruptive, efficient, and a fast-mover growing through a seemingly endless stream of acquisitions. An important milestone on this path was the announcement of the acquisition of the majority in Glovo at the end of December 2021.

Delivery Hero has been an investor in Glovo for several years and held an interest of approx. 44% (on a non-diluted basis) in Glovo by the end of 2021. On 31 December 2021, the company signed an agreement with shareholders in Glovo to acquire an additional 39.4% stake in Glovo in exchange for Delivery Hero shares, making Delivery Hero the majority shareholder after the closing of the transaction, which is expected to occur in the second quarter of 2022. The remaining Glovo shareholders will be able to adhere to the agreement before the closing. In exchange for the Glovo shares, Delivery Hero will issue its own shares to the sellers at a fixed exchange ratio the implies a GMV multiple valuation of Glovo in line with Delivery Hero´s current trading levels.

Glovo has a complementary footprint to Delivery Hero, operating in over 1,300 cities in 25 countries across Europe, Central Asia, and Africa. Glovo connects approximately 15 million active users annually with 70,000 monthly active couriers and 130,000 monthly active partners, and approximately 800 Mio. EUR in revenue for the year 2021. Glovo shall continue operations with their existing brand and platform under their current management team, but the two companies plan to leverage shared technology to further improve efficiencies and accelerate product development.

The announcement sounded like a continuation of the previous success story. But the shine didn´t last long. The majority takeover is a logical step in Delivery Hero´s strategy. But another message announced a few weeks later seems to have been even more important. Following a successful business year 2021, Delivery Hero expects to reach a positive adjusted EBITDA for its platform business for 2022. Does that sound good? At least not in everyone´s ears. The good news draws attention to the fundamental earnings power of the business. Some investors had confused sales with profits in the past. That can sometimes happen. The knowledge gained regarding the planned earnings improvement resulted in a sharp slide in the share price. Time to think about the business model?

 

 

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People

 

HELLA GmbH & Co. KGaA:

What name do you find first when you search for HELLA on google? German readers will know. It is the German comedian Hella von Sinnen. Is this a coincidence, or is it an allusion to the upheaval due to the recent changes in the shareholder structure?

Anyhow, this announcement also fits into the picture. On 4 February, HELLA announced that the shareholders´ committee of HELLA GmbH & Co. KGaA has agreed with the Chairman of the Management Board, Dr. Rolf Breidenbach, to terminate his contract as Managing Director by mutual consent as of 30 June 2022. It was further agreed that Dr. Breidenbach will support the de facto group (Faurecia/HELLA) and a consultancy agreement which is still to be negotiated.

Ups, no thanks, not even kind words, just contract termination. A closer look at the costs, both financial and otherwise, is almost inevitable when looking at this announcement.

 

Deutz AG: Deutz received a wake-up call

Denying facts is not a good business practice. Instead, something like this can have dire consequences for the management, the company, and the owners. Recently, the board of directors, the supervisory board of Deutz AG, and shareholders also had to experience this.

On 12 February 2022, the company announced that the Chairman of the Board of Management, Dr. Frank Hiller, was dismissed from the Board by the Supervisory Board, with immediate effect. The CFO Dr. Sebastian Schulte took over his duties with immediate effect. The vacancy on the Board of Management shall be filled by a female member following the second German Act on Equal Participation of Women and Men in Leadership Positions. In addition, the Supervisory Board elected Dr. Dietmar Voggenreiter as the new Chairman of the Supervisory Board. The previous chairman, Dr. Bernd Bohr, has resigned from his position with immediate effect and will continue to serve as an ordinary member of the Board.

Yesterday is over. Nice, that this was also noticed in Cologne.

 

 

 

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Capital News

 

Aareal Bank AG: How much Result can it be, please?

Occasionally one finds lines where one pauses, moved. A perfect example is Aareal Bank, whose investor relations pages contain the following statement: “At Aareal Bank, the dialogue with share and debt investors ranks highly.”

Good to know. Because the bank currently has a lot to explain. To put it mildly, the company's administration hasn´t exactly covered itself in glory over the past few months. From the point of view of many shareholders, the takeover bid submitted by financial investors was inadequate and the management did not address these concerns properly, which is why the takeover attempt failed despite its recommendation to accept the offer. According to the Boards, the offer was deemed to be advantageous from a strategic perspective, and the cash consideration of 29 EUR per share was considered to be fair.

Still, on February 4, 2022, the financial investors had to announce that the voluntary public takeover offer for all shares in Aareal Bank AG was not successful. What reaction from management would you have expected now? A mea culpa, something like “the communication didn´t work as planned”, a misunderstanding or even a clear “no one understands us”? Far from it” In Wiesbaden, you don´t stop there. Looking into the future seems to be much more promising anyway. Consequently, the bank informed on the same day about its plans to continue the growth path already expedited in the past financial year, and to exploit available opportunities for attractive new property finance business to an extent even stronger than originally communicated in 2021.

Wow, that was quick. It´s just a pity that the new plan could not be communicated to shareholders during the term of the takeover bid. What would the Boards have recommended to shareholders at the time if they had already known about the improved outlook for the bank?

 

Allianz SE: Not every Damage can be insured

Occasionally, the bad news is good news because it wasn´t as bad as initially feared. This was also the case with a message from Allianz recently. After all, the market had expected damage concerning the Structured Alpha Funds of up to 6 Bn EUR.

On February 17, Allianz informed that concerning the pending court and governmental proceedings in the U.S. concerning the Structured Alpha Funds it anticipates settlements with major investors in those Funds shortly In anticipation thereof and in light of current discussions with U.S. governmental authorities Allianz decided to book a provision of 3.7 Bn EUR in the financial statements 2021. The provision reduced the 2021 Group net income to 2.8 Bn EUR.

The matter does not end there, and discussions with remaining plaintiffs, the U.S. Department of Justice, and the U.S. Securities and Exchange Commission remain ongoing. Consequently, the total financial impact cannot be reliably estimated at this time, and Allianz expects to incur additional expenses before these matters are finally resolved.

Nevertheless, when things become calculable, they are also easier to manage.

 

GRENKE AG: Progress towards getting back to normal

The burdens resulting from a dispute with critical shareholders can be massive for companies, but sometimes there are positive effects at the same time. At GRENKE, the allegations made by a critical shareholder do not seem to stand up to scrutiny for the most part. Nevertheless, there are changes to the business model and above all the company´s communication with shareholders and the transparency of business activities have been improved.

Interestingly, BaFin also made a positive contribution to this development with its special audit of GRENKE AG and GRENKE BANK between autumn 2020 and spring 2021. Measures implemented by BaFin include an adjustment of the minimum capital requirements at GRENKE AG from 9 percent to 10.5 percent, while the respective SREP capital surcharge at GRENKE BANK AG was lifted to 11.5 percent (before: 8.5 percent). In addition, the GRENKE launched an extensive organizational development project, addressing a BaFin order that proper rules of procedure be ensured. The SREP capital surcharge is expected to be lifted provided BaFin is satisfied with the results of future tests at GRENKE.

This step completes the intensive audit period following the accusations made by an investor. But that shouldn´t mean that the company can return to business as usual. The share price is no longer moving in highly speculative waters. But it will certainly be some time before shareholders change their cautious approach to the stock.