Europe’s financial services companies, particularly the region’s banks, have long seemed ripe for intervention by activist investors.
A recent analysis by the Bank for International Settlements — the “central bank’s central bank” — showed that only in the UK and eurozone did banks have average market capitalisations lower than the value of their net assets.
Germany’s banks fared the worst, with an average price-to-book value of below 50 per cent. That is, you could theoretically double the value of a typical German bank by breaking it up rather than owning it in its current form.
Topping this ignominious European ranking is Deutsche Bank, with a discount to book value of more than 65 per cent. Little wonder, then, that it is the institution that has attracted an activist. Late last year Cerberus — that “hound from Hades” — acquired a leading shareholding and set about trying to shake up the bank’s ways of doing things.
It has not proved easy. First, Deutsche has huge strategic challenges. The business it long excelled at, the fixed-income side of investment banking, has become less attractive, following increased regulatory capital demands. Second, its motley set of other top shareholders (the Qatari royals, China’s maverick HNA and BlackRock) have significant influence. The recent sudden change of management, for example — the ejection of John Cryan as chief executive and his replacement by Christian Sewing — was driven by the Qataris, rather than Cerberus.
To make matters worse for the private investment group, the change of management has done nothing to revive the flagging share price. Since November, when Cerberus disclosed a 3 per cent shareholding, the shares have lost more than a third of their value. Controversially, Cerberus has now persuaded management to use its advisers to help Mr Sewing strategically, a move criticised by other top shareholders.
The BIS report said banks are well placed to improve valuations through better management of non-performing loans and costs. That indeed has begun to happen at some banks. But Deutsche’s problems are more intractable, because of the complexity of its operations and its core strategic conundrum.
Activists have targeted underperforming European banks at various junctures — Knight Vinke, for example, has taken aim at both HSBC and UBS over the past decade, with limited success. And indeed Cerberus has another German bank stake — in Commerzbank (discount to book value: 62 per cent). A Deutsche-Commerzbank merger, oft cited as a medium-term inevitability, may offer some upside for Cerberus.
But an activist’s nuclear option — that of forcing a break-up — has proved impossible to effect in banking, given the awkwardness of unwinding bank conglomerates and regulators’ concerns about financial stability.
With that in mind, perhaps, one of the sharpest activists of all, US hedge fund Elliott, has had some of its greatest successes on the fringes of the financial services sector. In the UK, it shot to prominence among financiers via its sustained and ultimately successful bid to shake up the traditional, and inefficient, practices of investment trust Alliance Trust 18 months ago. Now it has taken a stake of more than 5 per cent in Hammerson, the shopping centre landlord. As with the banks, real estate underperformers are easy to spot by comparing their share price with their published net asset values. Hammerson, at a discount of more than 30 per cent, is in the European “top” five.
With a more straightforward set-up than a bank, a property company can be swiftly restructured. Elliott’s strategy seems to be to push for the company to sell one or two big assets, with the aim of proving net asset valuations are not significantly overrated, and to combine that with a deferral of capital investment to fund a chunky share buyback.
The surprising thing is that other real estate investment trusts have not been similarly targeted. The UK’s two biggest Reits — Land Securities and British Land — are both trading at discounts of close to 35 per cent.
In the meantime, Hammerson has promised a strategic update on Tuesday. If it pledges anything close to what Elliott is aiming for — and the share price responds accordingly — expect the activists to go after other Reits in short order. For Cerberus to prove its point via its Deutsche and Commerzbank investments may take rather longer.