Towards a new Millennium
MILLENNIUM BCP, PORTUGALS largest private sector bank, is hardly alone these days in having to turn cap in hand to its shareholders for cash to repair its balance sheet. But whereas most of the banks that have gone begging recently have been victims of the sub-prime crisis, BCPs riches-to-rags story has nothing to do with bad lending decisions or dodgy credit instruments. The story behind its bargain basement rights issue, planned for this month, is largely about equity dodgy equity raisings, bad equity investments, a tumbling share price, disastrous M&A misadventures, management excess and a struggle for power in the boardroom.
But the election of an entirely new board in January and the announcement of a rights issue in April mark a turning point in the history of the bank and a chance to start afresh. Shareholders nursing losses on their investments, however, will want to see results soon.
"It takes a fight between two mother-in-laws to learn the whole truth," says the CFO of a leading Portuguese bank, translating a local expression. "BCP had always enjoyed a reputation as a national champion. Portuguese felt proud to have a bank that was expanding internationally and being taught as a case study at Insead. But it always seemed strange how the management could determine the whole life of the bank with such a free hand. It might be completely normal in a bank with a market cap of 100 billion but its almost unheard of for a 10 billion bank in a small country to be without a large shareholder that calls the shots."
In the case of BCP, it took a fight between the former chairman and former chief executive for the whole truth to come out. What emerged were secrets that would ultimately cost the jobs of everyone on the board and a national icon its reputation.
Carlos Santos Ferreira: using all his diplomatic skills to unite BCP investors
The younger man, Teixeira Pinto, owed his position as chief executive to Gonçalves, who had personally picked him for the job ahead of more obvious candidates.
Tensions began to emerge between the two, however, when Teixeira Pintos attempts to cut the banks bloated cost base and a series of bungled M&A deals stretched the relationship to breaking point.
BCP had just seen its revised 5.32 billion hostile bid for BPI, Portugals third-largest private sector bank, rejected and Teixeira Pinto was keen to raise the banks offer a second time, in order to avoid a repeat of the Banca Commerciala Romana debacle, in which BCP lost out on its bid for the leading Romanian bank by a mere 50 million and was heavily criticized as a result. Gonçalves, however, was opposed to the idea and wanted to consider BPIs counter-offer for BCP, although issues of management control, the exchange ratio and sensitivity surrounding the influence of Spanish bank La Caixa at BPI ultimately made that deal unacceptable too.
Frustrated by the chairmans tight grip on the reins, Teixeira Pinto set about courting some of the banks shareholders to solidify his personal powerbase, setting the stage for a confrontation with Gonçalves, who was enraged by the perceived betrayal.
"Teixeira Pinto decided to go his own way and tried to set up a core group of shareholders that would give him the backing he needed to kill his father at the next AGM," says a banker familiar with the situation. "When Gonçalves found out he made it his goal to get rid of him."
The dispute became one about the relative power of the supervisory and executive boards of the bank. Gonçalves, backed by long-time shareholders including construction company Teixeira Duarte and European insurer Eureko, wanted to increase the power of the supervisory board and make it even harder to alter the banks highly restrictive voting rights by raising the threshold from 66% to 75%. Teixeira Pinto, on the other hand, wanted to get rid of the general and supervisory council, headed by Gonçalves, or to expand its membership from 11 to 24, which could give him the upper hand.
Teixeira Pintos supporters included the colourful and controversial activist investor Jose Manuel Rodrigues "Joe" Berardo, who has built an almost 7% stake in the bank.
Rumoured to be one of the richest men in Portugal, Berardo is a prominent investor who made waves with his activist style in Sonaecoms attempted takeover of Portugal Telecom in 2007 but is widely derided by Lisbons elite circles for his flamboyant personality and poor grasp of Portuguese, a result of his having left his native Madeira at the age of 16 to make his fortune, starting with gold in South Africa.
Berardo lived up to his reputation for activism at BCP by, among other things, pushing for greater transparency about executive compensation. Before Teixeira Pinto became CEO, BCP board members had been earning an average of 3 million a year, about three to four times as much as board members at other Portuguese banks, despite the banks poor share price performance, and had grown used to an extravagant lifestyle of private jets and bodyguards. They had also proved stubbornly resistant to attempts to lower their pay, winning increases in fixed compensation that substantially offset a cut in their bonus allocations. In the hostile atmosphere generated by the fight at the top of the bank, it did not take long before the digging around senior executives pay led to the discovery of skeletons in BCPs closet.
The first scandal involved allegations that BCP had made illegal loans to the son of Jardim Gonçalves of about 12 million. These are now the subject of an investigation by the Portuguese regulatory authorities.
The second and most damaging allegation, also the subject of an official investigation, was BCPs alleged undeclared use of a series of offshore companies that traded in its own shares in capital raisings that now appear less successful than they did at the time.
Paulo Teixeira Pinto decided to go his own way and set up a core group of BCP shareholders that would give him the backing he needed to "kill his father"
During this time the bank relied heavily on its most loyal shareholders, who were predominantly clients or suppliers of the bank. The management of the time enjoyed a cosy relationship with these shareholders, who remained supportive despite years of poor share price performance as the relationships were supported by cross-shareholdings, sometimes indirectly via the banks pension fund, and preferential lending policies. Lending money to shareholders at favourable rates was a practice so engrained at the bank that it was for a while even extended to retail investors.
Thanks to such firm support, Gonçalves and his allies won the first round, kicking Teixeira Pinto out of the bank in August 2007 and replacing him with loyal acolyte Filipe Pinhal. But the damage to Gonçalves reputation had already been done and by December the pressure of the authorities investigations into BCPs illicit loans to his son forced him too to leave the bank, with his once golden reputation severely tarnished.
BCPs newer shareholders, unbeholden to the old guard, continued to fight, putting the pressure on Pinhal over the offshore share trading scandal. Worried by the damage to the countrys reputation and that of one of its most important banks, Vitor Constâncio, governor of the Bank of Portugal, stepped in, urging shareholders to seek a clean break with the past by appointing an entirely new board, effectively barring existing members from standing. Pinhal and other board members grudgingly withdrew their candidacy for a renewed mandate and BCPs shareholders rallied together to almost unanimously vote in a new executive team in January headed by Carlos Santos Ferreira, until recently the chief executive of state-owned bank Caixa Geral de Depósitos (CGD), Portugals largest bank.
Santos Ferreira, BCPs third chief executive in five months, has already begun to use all the diplomatic skills for which he is known to unite shareholders around the banks new strategic plan and to launch a much-needed rights issue. People whove worked with him believe hes an excellent candidate to smooth things over at BCP, having performed a similar feat at CGD roughly three years ago when he took over as the third CEO in two years. He is known to shun the spotlight, not even turning up at the annual general meeting that elected him.
Cost of failure
BCPs 2007 results, which were delayed to allow the new management team time to get involved, showed the effects of the years misadventures and infighting. The cost of the banks failed bids for rival BPI and defence against BPIs own failed counter-bid amounted to 103 million, with BCP suffering an additional 80 million impairment on the value of its substantial stake in BPI.
BCPs new management also wrote off 300 million of the banks equity to more accurately reflect the true economic substance of the offshore transactions being investigated.
Worryingly, the bank has also started to slip at home, where the damage to its reputation has been greatest. Rival banks, particularly Banco Espírito Santo and BPI, have been gaining market share across a range of products at BCPs expense. The banks consolidated net income in its core Portugal business, excluding exceptional items, fell 14.6% although operating income held up better, falling just 1%.
The banks core tier 1 capital ratio fell to just 4.3% from 5.48% the previous year, forcing BCPs new management to announce a rights issue of 1.3 billion, fully underwritten by Merrill Lynch and Morgan Stanley.
"The new managements most important task is to restore the banks image," says Andre Rodrigues, an analyst at CaixaBI, a leading Portuguese investment bank. "The appointment of the new team and the capital increase are a new beginning for BCP. It is a real turning point for the bank."
With many shareholders, particularly the newer ones including Berardo, nursing heavy losses on their investment in the bank and with a number of important shareholders themselves strapped for cash, BCP announced this April that the three-for-10 rights issue would be priced at just 1.20 a share, a hefty 45% discount to the banks share price at the time of the announcement.
Pressure forced Jardim Gonçalves to leave BCP, with his once golden reputation severely tarnished
Hong Kong billionaire Stanley Ho, who knows Santos Ferreira from his Macau days, is another cash-rich foreign investor who is expected to take up his rights in full via his Tan Ho vehicle, which owns about 3% of BCP.
The subscription period ended on April 24 and the new shares were scheduled to begin trading on May 6.
As well as using the capital raised to shore up its balance sheet, the new management hopes to use it to invest significantly in its international businesses, which are increasingly among BCPs most attractive assets. Total revenues from the banks international businesses, which include operations in Poland, Greece, Mozambique, Angola, Romania and Turkey, rose 40% in 2007 to 112 million, accounting for 19% of the groups net profit. Growth in Poland and Greece were particularly impressive, with net income rising 53.5% and 46.5% respectively.
Rather than sell some international assets and focus on improving efficiency and shoring up the banks position at home, as most analysts had expected it to do, BCPs new management is emphasizing international expansion as part of its ambitious new business plan to generate a net income of more than 1 billion by 2010.
The bank plans to allocate more than two-thirds of its capital to its international businesses in high-growth countries, opening 150 new branches in Poland and 235 in its other international markets. Management also told analysts that it hoped to double its aggregate net income in Poland and Greece by 2010.
Although the Polish and Greek franchises are now doing well, BCPs detractors say that its track record in international expansion is chequered, since the bank paid substantially for its assets, and that despite their potential, the domestic franchise is still worth 90% of the banks value.
Further M&A deals are off the table for the moment.