The collapse of Austria’s coalition government has scuppered the latest attempt by the state to offload its controlling interest in Creditanstalt. The new government will face the same problems in maximizing the sale value of a bank trapped in a quagmire of jingoism and vested political interests.
How long does it take to privatize a bank? This may seem like a rather facile question to most of us, but not to the Austrians. In April 1991, the Austrian parliament passed a law permitting the privatization of Creditanstalt-Bankverein. The manner of the sale was not to be fixed by parliament but was to be left to the discretion of the government. But after almost five years of quibbling over the minutiae of enabling legislation and the merits of a flotation or a tender sale, people began to wonder if the government really wanted to privatize the bank at all.
In September 1995, however, the government took the plunge and opted for a competitive tender. The state owns 68% of voting shares and 48% of total shares in the bank, and these were both put up for sale to the highest bidder. If maximizing the sale proceeds is the primary goal then a trade sale rather than a flotation is the obvious choice. “The bottom line is that whoever pays the most will win control of the bank,” says the socialist minister of finance, Andreas Staribacher. The tender documents – drafted by JP Morgan, the government’s adviser on the sale – clearly stated the intention of the government “to maximize the price of the Creditanstalt stock and to sell it against cash”.
But selling Creditanstalt was never going to be so simple. Within a week of the October 9 deadline for bid submissions, the government collapsed. The year-old coalition of the Social Democratic Party (SPÖ) and conservative People’s Party (ÖVP) fell apart over measures to cut the government deficit in the 1996 budget. The inevitable postponement of the sale means that the government must forgo Sch18 billion ($1.8 billion) of badly needed revenue. If Austria is to meet the 1997 deadline set by the EU for prospective member countries of the monetary union to have a budget deficit of no more than 3% of GDP, the only alternative to a large-scale privatization is draconian cuts in public expenditure.
Before its abandonment, the tender process put a magnifying glass to the jingoism and protectionism blighting Austria’s banking sector. The ground-breaking purchase of Austrian savings bank Bank für Arbeit und Wirtschaft by Germany’s Bayerische Landesbank in May 1995 provoked little opposition. But Creditanstalt is different. Apart from being the country’s second-biggest bank, it also has close links with the conservative ÖVP (known as “the blacks”) and acts as a funnel for political patronage and nepotism. The socialist “red” camp maintains its interest in the banking sector through the country’s largest bank, Bank Austria. The red and black camps will cling desperately to their banking interests until banks divest themselves of their massive industrial holdings.
The tender documents make no explicit reference to the preservation of Austrian interests, despite the clamour from the ÖVP for a clause to be inserted favouring an Austrian solution. But allowing Creditanstalt to fall into the hands of foreigners is still anathema to most Austrians. Even the federal chancellor, Franz Vranitzky of the SPÖ, is on record as saying that he favours Austrian core-ownership for Creditanstalt. The deputy chancellor and leader of the ÖVP, Wolfgang Schüssel, favours a similar solution.
Should foreigners be feared?
The fear is that, with a foreign takeover, the important strategic decisions of the bank might be subjugated to the policy of the multinational buyer. But those whose judgement is less clouded by political considerations state a clear preference for a foreign takeover, and with it an injection of new funds into the banking sector. Once a local buyer had consolidated its balance sheet, there would be no net increase in funds in the sector. In addition, a foreign buyer would be a strong force for rationalization in a sector already overbanked, overbranched and overstaffed.
But the omens for a clean transfer to a new owner, whether foreign or domestic, are not good. Creditanstalt leaves behind it a string of spurned suitors. In May 1993, a hostile bid from Raiffeisen Zentralbank (RZB), the traditionally conservative umbrella group of Austria’s rural banks, was rejected by the government on the grounds that it was not backed by a credible financing package. RZB offered to buy a controlling stake in Creditanstalt and then to merge both institutions, amounting in practice to a reverse takeover. From then on, the management and the ownership were to go their different ways.
A subsequent bid from CS Holding was shot down with a nationalistic fervour that alarmed many. CS wanted to buy the bank outright but the conservatives scuttled the bid with barely disguised xenophobia. “The CS bid was different,” says one source at Creditanstalt. “They made it clear that Creditanstalt would have been integrated with its new owner. As a result, important strategic decisions would have been made in Zürich.” CS is unlikely to be lured back into the fray. “The file on Creditanstalt remains closed,” says Gerhardt Beindorff, director of public relations at CS Holding. Insult was added to injury when the then head of the ÖNB (the central bank), Maria Schaumayer, proclaimed that the Swiss flag would never fly from Creditanstalt.
The ÖNB later disowned the comments. “We take no formal position on the matter of the sale of Creditanstalt,” says Dietmar Spranz, a member of the bank’s executive board. “The task of regulating the banking sector lies with the ministry of finance and it is not obliged to ask the opinion of the ÖNB. Our only desire is to see negotiations completed as soon as possible.” But Schaumayer’s outburst met with a warm reception from the management of Creditanstalt. A subsequent approach in February 1995 by German insurer Allianz was similarly given short shrift by Creditanstalt when information was requested from the bank. Allianz promptly withdrew its offer.
When the privatization of the bank was first mooted, the popular view was that it would be as part of a mass privatization of state assets involving a public offering of shares or a secondary offering for shares already listed. The conservatives wanted to privatize via the Vienna Stock Exchange even though its total capitalization is only Sch300 billion. “The exchange is a very narrow market,” says Staribacher. “Any major player, even the bank itself, could influence the price.” Indeed it’s worth noting that Creditanstalt has a 9.92% weighting in the ATX, an index of 18 blue-chip Austrian shares.
Missed opportunity
The management of Creditanstalt made little secret of its preference for a flotation in 1993 when bank stocks were in demand throughout Europe. While acknowledging that the Austrian market is illiquid, Joachim Kuehnert, spokesman for the managing board of the bank, contends that the market in Creditanstalt shares is liquid. “With 52% of the bank’s shares in private hands, there is already a high turnover of bank shares,” he says. Nor did Kuehnert see any need to restrict the sale to a domestic offering. “The bank could have been sold through the international capital markets,” he says. “In 1993 and 1994, this would have been viable because bank shares were in demand. Banks in France, Spain and Italy were not restricted to a local sale.”
Others at the bank are more scathing about the government’s refusal to consider an IPO. “Under a mass privatization, they couldn’t rule out that a big institution such as RZB would buy up a large stake, and the socialists are loath to see Creditanstalt fall into the control of the ‘black’ farmers,” says one board member. “Cooperatives like RZB are in a favourable position because they pay low dividends and can adopt a wait-and-see approach. Look at the returns on Creditanstalt shares. Are they really that attractive to a buyer wishing to maximize returns?”
When the government opted for an international competitive tender, the management of Creditanstalt threw its weight firmly behind a consortium led by EA-Generali, a subsidiary of Italian insurer Generali. Indeed, it may have masterminded its formation. Creditanstalt is the foremost bank in financing corporate Austria and the consortium includes many of its long-term business partners.
Much to the chagrin of Creditanstalt, Staribacher casts doubt on the Austrian pedigree of the bid. “The EA-Generali bid is a foreign bid,” he says. “The company is 80% owned by an Italian company.” Despite what Staribacher says, EA is regarded as part of the local business establishment. For the SPÖ, however, this may be the reason for their mooted enthusiasm for the bid. “Ideally, the SPÖ would rather a controlling interest was kept by the government,” says a senior banker at Creditanstalt. “If privatization is unavoidable then the bank should not fall into the hands of the Austrian business establishment.”
Generali was established in 1831 in Trieste – then a major port of the Austro-Hungarian Empire. After World War I, Trieste was ceded to Italy. But the roots of the company remained in Austria. “We’ve been in Vienna for 164 years,” says Dietrich Karner, the chairman of EA. This may explain why the Italian parent company, Generali, grants EA an unusual level of autonomy, despite owning 80% of its stock.
Commercial links between Creditanstalt and EA date back to the last century. More recently, relations were cemented by mutual stock holdings: Creditanstalt holds a 10% stake in EA and EA a 5% stake in Creditanstalt. In 1989, when Creditanstalt was looking for an insurance partner, EA was the natural choice.
Looking for independence
The EA- or Austrian-led consortium also includes Die Erste Österreichische Spar-Casse, a group of Austrian industrialists, Germany’s Commerzbank, Banca Commerciale Italiana, and Creditanstalt’s regional banking subsidiaries Bank für Tirol und Vorarlberg, Bank für Kärnten und Steiermark, and Bank für Oberösterreich und Salzburg. The consortium members plan to invest about Sch9 billion in the Creditanstalt stake, with the remainder of the purchase price being financed with loans. Karner sees the consortium as a group of core shareholders with a stake of between 10% and 20%, and with the balance to be placed via a secondary offering on the Vienna Stock Exchange.
Insurance companies, apart from ING, are generally not interested in running banks, and EA is no exception. This fits in neatly with the interests of the bank’s management. “More than half our stock is already in private hands, so we must pursue a policy based on the independence of the bank,” says Guido Schmidt-Chiari, chairman of Creditanstalt.
The consortium claims to be seeking financial return on its investment and not to be concerned with buttressing the conservative interests in the banking sector. “Under our ownership, Creditanstalt would preserve its autonomy,” says Karner. “We would not interfere in its management. The main motivation for the bid is to secure distribution channels through their outlets. We want to be Creditanstalt’s only insurance partner.”
Karner claims to be flexible on the balance of domestic and foreign ownership of the consortium. “In May of 1995, we placed a bid and offered to reduce the Italian participation,” he says. A tone of exasperation is increasingly evident. “Nobody could have seen that Lacina would have abandoned the ship. Another month would have been enough. And now the government has fallen.” The former minister of finance, Ferdinand Lacina, resigned from the government mid-way through 1995, disapproving of the direction the government was taking. Before his departure, he held talks with the consortium on the sale of the bank.
It seems, however, as though the consortium may be foundering. Commerzbank’s chairman, Martin Kohlhaussen, is on record as saying the bank is standing by the consortium but will not be buying at the price demanded. (Commerzbank is to acquire a 5% stake in Creditanstalt under the consortium plan).
The government is obliged to ask the consortium for a fair price because the sale must be vetted by the public audit office. “By international standards, the bank is not overpriced,” says Staribacher, an auditor by profession. “It is capitalized at Sch25 billion.” But JP Morgan’s valuation of Creditanstalt at Sch28 billion breaks down to a share price of Sch900. Shares are trading at a little over Sch500. A control premium of 30% is to be added to JP Morgan’s estimate of the intrinsic value of the bank.
Priced out of the market
The management of Creditanstalt complains bitterly that the government is asking too high a price for the bank, and has cast doubt on the valuation method. “Listed companies are normally sold on a different basis – either with a premium on the book value or on the price per share on the stock exchange,” says one disgruntled board member. “The market valuation and even the balance sheet of the bank were not taken into account. If JP Morgan had recommended a 30% premium over book value, we would have understood.” Hinting at some foul play on the government’s part, he goes on to say that the SPÖ has so overvalued the bank that the EA-Generali-led consortium has been priced out of the market.
When the tender was launched, the target price was 80% above the market value. In typically temperate language, Karner describes this as naive. “Maybe the SPÖ wanted to discourage bids,” he says. “We know that no serious domestic or international player would pay the price being asked.” The EA-Generali-led consortium’s latest offer is not thought to be far off its initial offer, lodged in May 1995, of Sch680 per share.
At the time the valuation was made, the stock was trading at 96% of its book value. Since then it has slid to 85% of its book value. Either you assume the market knows something and trades at a discount, or that it undervalues the stock. JP Morgan clearly believes the latter. Indeed, Walter Schuster of the bank’s advisory group acknowledges that the control premium is high relative to the market’s valuation of the bank, but stresses that most pundits predict the stock will outperform the market over the next year. “It is difficult, if not impossible, to find other examples of a profitable bank trading at a discount,” he says.
Ripe for asset-stripping
Creditanstalt has always been a moneyspinner, except for the bad years of 1991 and 1992 when bank shares all over Europe were in the doldrums. But 1993 and 1994 saw a big turnround in the bank’s fortunes. Finally, it seemed the time was right to privatize. In 1995, however, all Austrian blue chips were afflicted by the general malaise of uncertainty over the stability of the government.
Rival bankers are queuing up to hurl mud at Creditanstalt over the stance it has taken. “Have you ever heard of a management board complaining of overvaluation,” says one, “especially the management of a quoted company where some 50% of the stock is listed. They are arguing that the bank is worth less than its capital. In fact, they seem to want to broadcast the fact.”
If the current asking price were to stand, Creditanstalt would be a more enticing purchase to a foreign buyer who would show little compunction in stripping the assets of the bank. At its present market capitalization, it would be possible to generate Sch7 billion from the sale of building materials company Wienerberger Baustoffindustrie, one of the bank’s main holdings, together with a control premium. Selling stakes in the three regional banks could be expected to raise a further Sch3.2 billion.
Thus a controlling interest in Creditanstalt could cost a foreign buyer as little as Sch8 billion. An Austrian buyer, on the other hand, would run the risk of upsetting mainstream political opinion if it attempted a similar stripping of the bank’s assets. Karner is at pains to stress that the EA consortium would preserve Creditanstalt as a single entity.
Staribacher would not be drawn on who the bidders are. But the secrecy surrounding the bids is fuelling speculation in Vienna that no major international players met the October 9 deadline. ING denies any interest in the bank, seeing little if any synergy between the institutions. Nor is Creditanstalt on the shopping list of Dresdner Bank. According to management board spokesman, Jürgen Sarrazin, the bank is not interested in buying into a commercial bank with a branch network outside of Germany.
Much of the speculation about a potential foreign buyer centres on General Electric Capital (GE), which will neither confirm nor deny an interest. But Creditanstalt is loath even to feign enthusiasm for a GE bid. “GE has been successful up to now because it stayed out of classical branch banking,” says one source at the bank. Until September 1995, when it placed a preliminary bid for Hungarian state-owned bank Budapest Bank, GE had described itself as a “non-bank bank”, avoiding classical lending and deposit-taking for ancillary business such as storecards and leasing.
Whether or not the SPO remains the dominant party in a new coalition government, the sale of Creditanstalt will require the consent of the socialists – a grim prospect given the bitterness already blighting the sale. Relations between management and government reached their lowest ebb at the beginning of October 1995 when the chairman of Wienerberger accused JP Morgan of actively soliciting bids for the company.
The US bank vehemently denies the charge. “Why would we solicit bids for the company when its owner, Creditanstalt, had not awarded us the mandate for the sale?” says a senior member of the bank’s advisory division. “We don’t do work that we haven’t been asked to do.” Staribacher has maintained all along that the government would sell the bank as a whole, including its industrial holdings.
The aggrieved JP Morgan sees itself as the scapegoat for a crude attempt to taint the sale process with the prospect of asset stripping. So what prompted the scaremongering? Perhaps it was an attempt to stir up some popular opposition to a foreign takeover.
Government-bank acrimony
The acrimony generated by a one-page advertisement which appeared in theFinancial Times on September 7 1995, outlining the terms of the tender, is further proof of the depths to which relations between owner and management have sunk. “We are a publicly quoted company,” says a Creditanstalt board member. “Why did the government officially ask JP Morgan to publicize the price in a one-page advert in the Financial Times. This did not help the government’s negotiating position.”
JP Morgan, however, tells a different story. “The management of Creditanstalt demanded a full-page advert in the Financial Times, contending that everyone should have the same access to the terms of the privatization,” says a source at the bank. JP Morgan claims that it pressed for a list of potential buyers to be discussed with the seller so that the negotiations could be kept secret. “We said we wanted to pursue this route, so they demanded the publication of the text,” says the source.
Mending bridges will be an urgent task for the new government, as it faces tough budgetary negotiations in which Creditanstalt will play a crucial role. But the bank cannot be privatized in the first quarter on the basis of a balance sheet that dates from a year ago. So the process can only be revived at the end of the first quarter. The JP Morgan valuation was based on the 1994 results and estimates of the 1995 results, and so will have to be revised in 1996. “I will be happy to reopen negotiations with the EA consortium and any other bidders next year,” says Staribacher. “But the JP Morgan estimate of the price will depend on the 1995 results.”
Whether he is allowed to honour this pledge is another matter. Staribacher is young, inexperienced, and lacks a power base, although the chancellor is on record as saying he would reappoint him if the SPÖ remained the dominant party in a future coalition.
The tender process Staribacher initiated, by enticing large foreign players to look seriously at the potential of Creditanstalt, would be a worthy legacy for the young minister. An injection of foreign management into the bank would shake up a turgid Austrian business establishment, which has traditionally pursued market share at the expense of profit. Low margins in the Austrian market will deter some foreign buyers, but the bank’s bedrock of contacts and branch network in Eastern Europe would be difficult to match with greenfield operations.
Walter Rothensteiner, the chairman of RZB, neatly sums up the folly of the conservative’s opposition to the sale of a majority stake to a foreign buyer. “European banks will enter the market and will not observe party allegiances,” he says. “As bankers, our primary concern must be to manage a balance sheet.”
Bank Austria and GiroCredit: an uneasy partnership
Creditanstalt’s arch-rival, Bank Austria, is enduring its own growing pains. Late in 1994 it bought a controlling interest in GiroCredit, the umbrella bank of the savings bank sector, through its parent company Anteilsverwaltung Zentralsparkasse (AVZ). The takeover was financed through a loan from Bank Austria to AVZ, a foundation controlled by the city of Vienna, enabling AVZ to buy 56% of ordinary shares in Giro.
But AVZ also has a near 51% holding in Bank Austria. This neat little accounting trick is only tenable as long as AVZ maintains its status as a foundation and not a holding company. If AVZ has its status changed under Austrian law to that of a holding company, it will be required to produce a consolidated balance sheet of its holdings in Bank Austria and GiroCredit which would entail a drastic reduction in its total assets.
Stronger ties with savings banks
During the period of almost four years since the merger of Zentralsparkasse and Österreichische Länderbank which formed Bank Austria, AVZ has resisted attempts to change its status. And although the socialist SPÖ will also resist any moves to redefine AVZ as a holding company, now that Austria is a member of the European Union, there may be no alternative. EU rules oblige financial holding companies in member countries to produce consolidated balance sheets.
AVZ is on the retreat and desperately seeking a grace period from the ministry of finance to prevent its capital base shrinking by some Sch8 billion, given that an increase in capital from the markets is unlikely. Because a consolidated bank would have had problems meeting its capital adequacy requirement, a 10-year implementation period was proposed by the last government – although the consent of the conservative ÖVP still had to be secured.
The concern at Bank Austria was that once Zentralsparkasse was submerged within the operations of a larger more diversified bank, it would forfeit its dominant position within the savings bank sector. Bank Austria wanted to strengthen its ties within this sector and GiroCredit seemed the perfect vehicle to this end.
But the takeover has not gone as smoothly as Bank Austria would have hoped. Whatever its strategy, Bank Austria is committed to maintaining GiroCredit’s role as a quasi-central bank for the savings bank sector.
Under Austrian banking law, a proportion of larger savings banks’ reserves and smaller banks’ total reserves must be held with Giro. But as the sector consolidates, many of the other services provided by Giro are no longer required by the larger regional savings banks, particularly in securities trading and foreign business.
A number of bad loans add to the problem. Despite a 60% increase in earnings in 1995, GiroCredit is still hamstrung by large provisioning requirements amounting to Sch1.8 billion for the year. These provisions are the legacy of the 1980s when it tried to break into the big league, lending to entrepreneurs such as Ireland’s Larry Goodman.
The bank has since restructured, strengthening credit controls and risk management. It has also sought to diversify its capital base away from the regional savings banks. Late last year, it raised $30 million by converting participation certificates – a hybrid of bonds and shares – into preference shares, and by issuing warrants with the new preference shares. The move was aimed at strengthening the bank’s capital base which was previously dominated by the savings banks.
Bank Austria is likely to merge most of GiroCredit’s activities with its own, leaving only the core of its old business. “They took us over with specific franchises in mind,” says a senior banker at Giro, “such as specialized finance in London and lending out of New York.”
However, Bank Austria’s chairman Gerhard Randa has made little secret of his dissatisfaction with the cooperation between Bank Austria and GiroCredit. He points to the potential for savings at the subsidiaries in London and New York, where both Bank Austria and GiroCredit have representative offices. An agreement was reached at a board meeting in October between Bank Austria, GiroCredit and AVZ to complete a report on the rationalization of both banks by the end of the first quarter of 1996.
Rationalizing overseas branches
Analysts at Bank Austria put the operating costs of the four Bank Austria and GiroCredit branches in London and New York at about Sch750 million a year. Potential savings would be between Sch250 million and Sch300 million. But relinquishing these branches would wipe about Sch60 billion off Giro’s balance-sheet total. Thus, Die Erste Österreichische Spar-Casse (“Die Erste”) could in future be larger than GiroCredit if it were to consolidate its stake in Salzburger Sparkasse.
Personal relations between Giro’s chairman Herbert Lugmayr and Bank Austria’s Randa are increasingly strained, despite previous experience of working together. Before becoming chairman of GiroCredit, Lugmayr was at Zentralsparkasse. And
who was his secretary? None other than Randa.
Lugmayr denies that he is being uncooperative. “We are doing it in a reasonable way,” he says. “The owners have the right to force the management of the bank to earn money for their investments.”
The signs are, however, that their working relationship may be coming to an end. It seems likely that Lugmayr will present the 1995 final results, announcing the resumption of dividend payments and subsequently step down on health grounds. -RL
