Foreigners carve up Poland’s banks

The Polish authorities have long taken a bold approach to restructuring the banking sector – a major national liability in the early 1990s with most (former state) banks brim full of abysmal, underperforming loans to abysmal, underperforming corporates.

Foreign banks seeking a presence were told to take over these banks one-by-one to gain a local banking licence. The great Polish banking sell-off, which started in 1994, has continued apace ever since. But what seemed to be an endless stream of opportunities has in the past few months dried up. The seats in this bankers’ version of musical chairs, with so many now occupied, suddenly got scarce.

How were players of the calibre of Commerzbank, Deutsche Bank and Citibank left scrapping for a seat? Partly because of a failure to act when there were more opportunities. During 1999 both Commerzbank and Deutsche Bank finally started to develop aggressive local plans while at the same time Citibank walked away from a major commitment to Pekao. “These guys simply overslept,” says Martin Nejedly, Wood&Co’s bank analyst in Warsaw. “They woke up and found that there was hardly anything left.”

The first serious moves in today’s endgame were initiated in mid-1999 when a proposed merger between BRE and Bank Handlowy was announced – clearly driven by Commerzbank, a 49% shareholder in BRE. The terms, 2.4 BRE shares per Handlowy share, implied a Handlowy valuation of around Z55 ($13.40) a share. For Alastair Ryan, Polish analyst at Warburg Dillon Read: “The terms were way too low – strategically it looked like a great deal [for Commerzbank] – but they just had to try and do it on the cheap”.

The market’s response was decidedly negative.

Most international investors agreed with Ryan, feeling that the appropriate merger multiple should be fewer than two BRE shares per Handlowy share, around 10% to 15% above Commerzbank’s proposed terms.

The most vocal opposition came locally from PZU, Poland’s state-owned insurance company, which owned 10% of Handlowy directly (the state treasury, siding with PZU, owned a further 2%) and a further 23% through holdings of convertible bonds. Commerzbank, despite PZU’s apparent openness to discussion, decided not to negotiate and declared its offer immutable. “I just can’t believe that Commerzbank did not seek to involve PZU – cash-strapped, partly privatized and ready to deal.” reflects one corporate financier. “It should have been an easy deal to close. Their advisers should be shot.”

Things started to get decidedly sticky at this point. “Commerzbank really underestimated PZU’s commitment and tenacity,” adds Wood’s Nejedly. Infuriated by the lack of flexibility at Commerzbank, PZU, joined by a number of international fund managers including Schroders and Flemings, focused on opposing the merger at the shareholders emergency general meeting in December. Requiring 25% of voting shares to guarantee success, PZU and its allies entered the EGM confident of blocking the motion.

What followed was, says Ryan, “a thoroughly unedifying spectacle” as Commerzbank, aided by its associates, principally JP Morgan, delivered a summary quasi-legal judgement during the meeting that effectively and on the spot reduced the voting rights of PZU’s shares to a level that nullified their opposition to the merger. Nejedly viewed Commerzbank’s actions as “essentially underhand, although it was probably a desperate reaction, almost spur of the moment, to the fact that PZU seemed to have lobbied the shareholder base so effectively.”

Resort to the courts

After the meeting, PZU immediately resorted to the Warsaw courts. This ensured the suspension of the merger pending legal clarification – something that might take months. The merger was effectively derailed. At the same time, PZU mandated Nomura to seek an alternative buyer for its, and the treasury’s, shares in Handlowy.

Citibank, already with a significant local presence, had previously sought to achieve critical mass in Poland through assiduously courting Pekao during its privatization in 1997. But it had pulled away from that marriage at the altar, ostensibly on the basis of price. “Citibank was too cautious on Pekao and, with hindsight, it was a poor decision.

It now looks like a great deal for Unicredito [which owns 52% of Pekao],” comments Nejedly.

“I bet Citi couldn’t believe their luck when Commerzbank messed up,” says one banker. Banks of size and quality are few in Poland and the opportunity presented by Commerzbank’s inability to execute proved irresistible.

Citibank negotiated a period of exclusivity with PZU. In mid-February it agreed to buy both the shares and the convertibles: an insurmountable stake. Within 24 hours, Commerzbank threw in the towel. Marek Juras, banking analyst at Erste Bank in Warsaw comments: “I don’t really believe that they wanted to [give up] but I don’t think they could get the support of any of the other major shareholders [Swedbank, Zurich Insurance, JP Morgan] to continue with their Handlowy strategy.”

Participants and observers are left with mixed opinions on how this shambles leaves Commerzbank positioned in Poland. Juras says: “In the past BRE has taken considerable market share from Handlowy – this could well go the other way now. Commerzbank’s strategy, reduced to growing BRE, is basically flawed compared with what they could have done.”

But Nejedly is less critical: “Commerzbank have BRE, which has a great franchise, and could afford to have a go at Handlowy at a cheap price. Perhaps, with hindsight, they should have pressed harder – some aspects of the deal were compelling.”

James Mellersh, Morgan Stanley’s emerging Europe bank analyst, comes at things differently. He is more concerned about the tactics that banks headquartered in developed market economies are prepared to adopt away from home. “I can’t understand why it is that companies and their advisers in Poland seem so intent on abusing and riding roughshod over basic shareholder rights. Sure, the sneaky, legalistic approach [that Commerzbank at the EGM] adopted may have worked, but in reality it was below the belt and should have been unnecessary. Had this transaction been based on international best practice then Commerzbank would have succeeded.” Pointedly, Citibank has committed itself to making a virtue of running a transparent acquisition strategy for Handlowy.

In Poland minority investor rights are routinely abused by foreign corporates during takeovers. Rupert Wood, on the CAIB sales desk in London, talks about the “Czechification of Poland” linking current Polish practices to the atrocious record of Czech corporate governance during the 1990s. “It would be comical if it weren’t so sad. Investors are completely fed up with being stuffed by overbearing foreign corporates.”

Greedy government

Some of the blame, however, must lie with the greed of the local Polish authorities. Juras says: “PZU wanted a higher price for its Handlowy block. It was that simple. Its opposition to the merger had nothing to do with the interests of minority investors.”

Nejedly goes a step further, pointing out the complicity of a range of Polish government bodies in another celebrated banking takeover, that of Krakow-based BPH by Bayerische HypoVereinsbank (BHV).

In this deal the treasury sold a block of 37% of the shares to BHV at over twice the price eventually offered to minorities. The European Bank for Reconstruction&Development also sold a block of 10% in two tranches at a price that has to date not been disclosed – although it is commonly assumed in Warsaw that this was close to the price achieved by the state.

The Polish authorities have taken a remarkably relaxed attitude to this two-tier pricing. The Banking Supervisory Board granted BHV the right to move to 80% in BPH, the Securities Commission authorized the trades, and the stock exchange allowed a special off-session transaction to cross the block.

To ensure the mockery is final, BHV, having assured minorities that it would retain a 20% free float, nonchalantly passed through that threshold – without challenge from any authority – in January. “Nobody has any interest in asserting the rights of minorities. These [state bodies] are men of straw,” says a London-based corporate banker.

The role of foreign investors – especially in the banking sector – is now high up the political agenda. In January, Emil Wasacz, minister in the state treasury responsible for privatization, narrowly survived a no-confidence vote in parliament. The Polish government, a centre left coalition, holds a decidedly thin majority through binding together traditional centrists and reformers – groups with little in common on the economic front.

A cadre of anti-reformists in the coalition, sensitive to the more populist undercurrents in their constituencies, joined the no-confidence vote. At the count, Wacasz survived by a mere two votes – both of these members, according to Ryan, referring to an extraordinary period of arm-twisting in the run-up to the vote, were reputed to have been “shopping” at the crucial juncture.

The point of contention, however, was not lost on the government. The consequence of this close shave was the effective removal of the final two major Polish banks, BGZ and PKO BP, from the privatization process. Neither can now be sold to foreign banks, nor more pointedly to Polish banks with a substantial foreign shareholder. Banks and foreign investors, particularly German and major state-owned companies (such as PZU) are clearly hugely controversial in Poland at present.

Deutsche Bank, like Commerzbank, has had to carve its position in the sector at a time that could hardly be less auspicious. “That Deutsche Bank feels it must undertake such moves at such a sensitive time only serves to demonstrate how critical securing a substantial Polish presence had become” says Ryan. “That it should have focused on BIG Bank Gdanski for its manoeuvring is extraordinary too.”

BIG has long been the Cinderella of the sector – nobody was quite sure how it had got to the Polish banking ball at all, far less what exactly lay under the outwardly impressive exterior of the institution.

The Poles profess a concern about German involvement in the banking sector, and the Germans, at Deutsche Bank at least, have suspected that they are not on a level playing field when it comes to access to the best banking oportunities in Poland.

As one Deutsche Bank source comments: “We had tendered so many times for privatization candidates – with no success. It was beginning to seem as if we would never gain a meaningful presence.” Deutsche Bank in 1999, as a sop to the authorities, acquired a local banking licence through BWR, a small and insignificant local bank. But it was an inadequate platform and critical mass remained a distant prospect.

Buying Handlowy was always going to be too heavy with symbolism for Deutsche Bank – which may have coveted the operation but recognized that it would never be allowed near it. In the second half of 1999, Deutsche began stalking BIG Bank Gdanski, moving to a stake of more than 13% in the new year.

In addition, several parties thought to be friendly to Deutsche Bank, including Austrian bank Raiffeisen, three Swiss banks and one Panamanian bank (identities were officially unconfirmed as they are just below the 5% disclosure threshold), had moved onto the share register in scale. It was generally assumed by January that Deutsche could call on the support of over 40% of BIG’s shareholders.

One block remained significant and decisive – again that of PZU, the holder of around 9% of BIG. Deutsche Bank called an EGM to seek representation on the BIG supervisory board in January. In a surprise move (at least to everyone except Deutsche Bank)

PZU chose to vote with the Germans on the first agenda item – who should chair the meeting. It abstained on the next item, the sacking of the supervisory board, and had left the meeting for the additional items which involved the appointment of a new, pro-Deutsche supervisory board. That new supervisory board then immediately convened a meeting and Fired BIG’s chief executive officer and three members of the management board.

Ryan, ever alert to the tragicomic side of the Polish capital markets, points out wryly: “The following day two management boards turned up for work.” Unsurprisingly, there were accusations of vote-rigging and skulduggery.

As with the BRE/Handlowy merger, the Warsaw court – the only Polish authority that has acquitted itself effectively during these corporate manoeuvrings – had to step in and required a rerun of the meeting.

This resulted in a similar outcome, and Deutsche Bank moved to formal control of supervisory and management boards in February.

Once again in Poland control changed hands with no effective bid. However, for Juras and other local analysts the way in which the major parties in this deal purchased their shares – at increasingly ridiculous prices (the shares were recently trading at over six times book with the sector on less than two times) – has, in essence, constituted a de facto take-over offer at an attractive price.

Warburg’s Ryan points out that with over 93% of shares registered for the First EGM, “most genuine minority investors sold out of this situation months ago and at attractive prices”.

PZU’s apparent role in the demise of BIG has not been to the liking of the Polish establishment – Wladyslaw Jamrozy, PZU’s CEO, was suspended immediately afterwards. There has been much speculation on the basis for PZU’s actions. It has become clear that Deutsche Bank held a confidential option to acquire PZU’s block, negotiated last November.

So clearly profit was important.

Personal factors

It has also been suggested that there was a personal issue – BIG, in association with Eureko, a vehicle for several major European insurers, owns 30% of PZU. On acquisition of the stake in late 1999 a radical overhaul of PZU senior management was driven through, leaving only Jamrozy and one other executive in place.

Revenge may have played a part. Deutsche Bank has naturally been keen to establish in Poland that it is not stalking PZU – a highly sensitive national asset – but Jamrozy has been characterized, particularly by more nationalist politicians, as the traitor who has risked this national champion.

Wood’s Nejedly senses the tension in Deutsche Bank’s strategy: “BIG was the easiest target to go for given that Deutsche Bank seemed not to get shortlisted [on the major privatizations] – it was the only major bank with a genuine free float. But it is the most difficult bank in Poland to run”.

The difficulties to be faced by Deutsche Bank lie in the importance to BIG of its founder and chief executive officer, Boguslaw Kott.

Kott has, since 1991, built the bank in his own image – aggressive and commercial, connected yet opaque – and has surrounded himself with like-minded, trusted executives.

“I’ve really no idea how they [Deutsche Bank] intend to manage BIG,” says Juras. “It’s going to be very difficult. Decisions at BIG have always been highly centralized around the top guys. The middle-level and lower-level managers have never had much influence.”

That top level, in almost its entirety, is now alienated. Kott himself will be impossible to replace. One of the original early 1990s’ entrepreneurs, he has always played an exceptional inside game in the new Polish establishment.

At the end of February, armed with yet another court injunction, this time overturning his own ousting at the extraordinary general meeting, Kott tried to resume his position as chief executive officer. But by March, Deutcshe Bank appeared to have tightened its control over BIG.

Eureko and other shareholders had lobbied for another shareholder meeting in mid-March, presumably in the hope of somehow scuppering the Deutsche Bank takeover. They later dropped this request.

The sense in Warsaw is growing that unless both sides reach some form of compromise, BIG Bank Gdanski’s business franchise will be seriously damaged as unsettled customers desert it. One deal being talked of is a carve up of BIG’s branch network with Portugal’s BCP.

That Deutsche Bank in Poland, ably led by Hubert Janiszewski (see box), who has a vast amount of experience himself in negotiating complex issues in the smoke-filled boardrooms of Warsaw, should envisage taking over such a personalized, tight-knit management group as that of BIG on a hostile basis underlines the desperation of the situation for the Germans.

Financially, BIG is small – but it offers

a critical entrée into mainstream Polish banking. That it will create myriad problems over the years seems inevitable. But as is clear from other markets, where Deutsche Bank sees a long-term commercial imperative, it will bear any pain necessary to stay in the game.

International analysts and investors, unsurprisingly, are now struggling to recommend the banking sector. Most of the major banks, with the exception of Pekao, are reduced to a minimal free float.

As Warburg Dollin Read’s Ryan points out: “Our clients are pretty cheesed off – a sector which should have offered a convergence story and compound growth rates similar to those experienced in, say, Spain over the last 10 to 15 years has now disintegrated into a morass of subsidiaries of international banks. What is worse is that those banks are competing on price for market share – with that market now likely to be distorted by two major Polish banks remaining in state hands.”

Deutsche Bank goes hostile in Poland

Euromoney spoke to Hubert Janiszewski, head of Deutsche Bank’s investment banking team in Poland and architect of the successful hostile take-over of BIG Bank Gdanski. Janiszewski is one of the more accomplished advisers in Poland, involved in most major bank deals, first as head of HSBC’s local operation and latterly at Bankers Trust by way of which he arrived at Deutsche Bank in early 1999. In 1994 he worked on the BPH privatization and floated the local insurer, Warta, before bringing BIG to the market in 1995 and working on the PBR and PBK privatizations in 1996 and 1997.

When asked why Deutsche Bank left it so late to get into Poland, Janiszewski points out that for some time privatization opportunities had been pursued as a core strategy. These had been unsuccessful. “Deutsche Bank had a desire to participate in privatizations but lost out on BPH. Probably we were less competitive on price.” Deutsche was similarly unsuccessful on Pekao and Zachodni and although Janiszeski is unwilling to comment, he does not deny that this may have been because of political interference.

It is difficult to imagine that Deutsche Bank ever really had a chance. “Nobody in Poland ever had a problem with Deutsche Bank as a professional bank,” Janiszewski says. “But there is an appreciation of a historical past and an awareness of Germans. Deutsche Bank seemed almost synonymous with Germany.”

Somehow it was easier, less sensitive, for Commerzbank or Bayerische to gain a foothold.

The first strand of Deutsche Bank’s strategy for entry thus frustrated, a second strand came into play: linking with a private bank. “We liked the possibilities of BIG Bank Gdanski – we felt there were synergies and a dynamic management team. We began courting them in early 1999 with a view to a strategic alliance”. As so often happens, after a positive start, the talks drifted. BIG’s management became concerned over the degree of influence the Germans appeared to be seeking.

Deutsche bankers started to feel uncomfortable that the alliance BIG sought involved no significant sharing of board-level responsibility. This spring courting was well and truly cooled by the autumn frosts.

Toeing the party line, one that Deutsche Bank speaker Rolf Breuer felt compelled to trot out on a feather-smoothing mission to Warsaw in February, Janiszewski denies that the bid was hostile, pleading: “We are not the largest shareholder.” Janiszewski will also not be drawn on the group of friendly shareholders that appeared on the BIG registry in late 1999 – Raiffeisen and several holding companies, reputed locally to be associated with Vontobel, Julius Baer and Nomura. “We came to the conclusion that direct talks [with BIG management] would never be successful and we decided to talk to other shareholders who might hold our views on taking the bank forward,” says Janiszewski.

It was in a confidential agreement last November 4 that Deutsche Bank locked up PZU’s holding in BIG. It was to become a pivotal stake. Janiszewski describes it thus: “We had been in touch with PZU on an on-and-off basis.

We negotiated a confidential agreement under which they agreed to sell their shares to us at what seemed an attractive price in certain conditions. We were acting entirely within our regulatory limits. We saw no need to announce this agreement. We had a right to acquire but absolutely no control over how the shares might or might not be voted.” Did Deutsche have agreements with any other BIG shareholders? “We only had an agreement with PZU – there were no other agreements in place”.

Janiszewski was appointed chairman of the first emergency general meeting and is now chairman of the new supervisory board on which Deutsche Bank holds nine of 19 seats, with PZU holding a tenth. Janiszewski expresses amazement at PZU’s voting patterns at the EGM -where Jamrozy (PZU’s CEO) voted for one motion, abstained on the next and disappeared for the balance. Janiszewski bats away any questions without comment – although he agrees that PZU’s role was “very material to the outcome”.

When questioned about the current share price, Janiszewski feels it is “very high, definitely overvalued. It must be speculators who are expecting a tender offer or something. Deutsche Bank has no requirement to undertake any further share purchases. Although we will seek approval from the relevant authorities for the consent to move to 33% of BIG Bank Gdanski in due course”.

With the shares so obviously overvalued, the question on the minds of analysts, and something on which Janiszewski would not comment, is what is in it for the shareholders that supported the Deutsche Bank manoeuvring?

Why aren’t they selling at these exceptional prices, now that Deutsche has effective control? Only time will tell.