Breaking Views - Cable & Wireless/CyberWorks
April 3, 2001
Edited by Hugo Dixon
Cable & Wireless PLC Chief Executive Graham Wallace has won plaudits for disposing of assets at top-of-the-market prices. The prolonged exit from C&W's 54% stake in Hong Kong Telecommunications Ltd. -- which reached its final lap with the launch of a $1.5 billion bond exchangeable for Pacific Century CyberWorks stock -- won't count among his greatest achievements. When the deal was announced on Feb. 29 last year, Mr. Wallace took as part of the consideration $6.1 billion cash. The rest was a roughly 20% stake in CyberWorks, valued by the market at $14 billion at the time, when the shares were trading at 22.15 Hong Kong dollars (US$2.84 or 3.23 euros) each. In theory, the deal was valued at a total $20.1 billion.
But not in practice. As CyberWorks' stock has bombed, so has the value of the consideration. Mr. Wallace managed to sell about a quarter of his CyberWorks shares for $1.32 billion, when the shares were trading at HK$9.88. But they have kept falling. Assuming the new bondholders eventually take the rest of the CyberWorks stake, Mr. Wallace will have realized a total of only $8.9 billion. That represents a 56% reduction compared to the initial value. Of course, telecommunications stocks have had a horrid year. But this is an even worse performance than the MSCI telecommunications index, which has declined 46% over the period.
Another way of skinning this cat is to take an earlier start date, such as Jan. 1, 2000, before bid speculation inflated share values. On these numbers, Mr. Wallace has still taken a haircut of more than 50% on the value of his Hong Kong Telecommunications asset. And he has still underperformed the MSCI telecommunications index. Far from getting a premium exit at the top of the market, Mr. Wallace has effectively managed to exit at a discount to depressed levels.
Allianz Must Decide Fate Of Investment Bankers
Anybody want to buy a mid-sized investment bank with a good franchise in equities and mergers? If so, just call Allianz AG. The German insurance giant is inheriting Dresdner Kleinwort Wasserstein as part of its takeover of Dresdner Bank. But it doesn't really want an investment bank. Its main interest is in bulking up in asset management and gaining a tame retail-banking network through which it can pump its products. So if another group comes up with an attractive offer for DKW, Allianz would probably listen eagerly.
1
For the complete set of comments go to breakingviews.com2
DKW is currently only a division within Dresdner, without even its own balance sheet. So it couldn't be sold easily. But after the Allianz takeover, DKW will be split out as a legally separate entity. As a second step, in two to three years, a minority of the shares will be floated publicly.
In making all these changes, Allianz has succumbed to unrelenting pressure from the DKW investment bankers. Ever since the past year's failed merger between Dresdner Bank and Deutsche Bank AG -- which threatened to carve up DKW -- the investment bankers have been keen to assert their independence.
Allianz doesn't pose the same problems as Deutsche Bank did, as the insurer doesn't have its own investment bank. But the DKW bankers have still extracted their price for backing the deal: not just a separate listing, but options over about 20% of DKW's stock. Given that DKW's value is estimated at around eight billion euros ($7.04 billion), that is no mean inducement to stop them from jumping ship. For many of the bankers, this will also be the second dip in the pool of riches in a year. Those that came with Wasserstein, acquired by Dresdner last year for $1.5 billion (1.69 billion euros), were weighed down with golden handcuffs. Meanwhile, the old Dresdner Kleinwort bankers were given a 500 million euro loyalty bribe to keep them onside following the Deutsche Bank fiasco.
Nevertheless, it must be touch and go whether DKW ever makes it to its promised flotation. The investment-banking industry is crying out for consolidation. And there are still doubts over whether DKW has enough scale to thrive as a standalone entity. It also has two attractive franchises -- mergers and acquisitions and equities. On the other hand, only the strongest souls would consider doubling up in investment banking in the current wintry financial climate. That said, if anybody did step up to the plate, the DKW bankers probably wouldn't scream too loudly. It would be another opportunity to dip in the pool of riches.
* * *
Munich Re
When Allianz decides at last to break the logjam of German financial sector cross-shareholdings, the logs don't always fall where smaller fish would like. Munich Re, Allianz's fellow Bavarian insurer, is presenting the effects from Allianz's takeover of Dresdner Bank as beneficial for its own plans to take advantage of the expected boom in German long-term savings, and to reduce dependence on the low-growth, cyclical business of reinsurance. But it is unlikely that Munich Re, which still expects to be 20%-owned by Allianz two years from now, was really in the driver's seat.
Munich Re is exiting from its minority positions in Dresdner and in Allianz Life by selling to Allianz. That seems sensible in principle, but the valuations haven't been disclosed. Munich Re's involvement in banking will now be through its Bavarian fellow citizen HypoVereinsbank. With a much-increased 25.7% stake, Munich Re becomes the largest shareholder in Germany's second biggest bank as measured by assets.
That suggests more local power-broking than shareholder value. But operationally, there could be benefits. Hypo will now only sell life policies from Munich Re's offshoot Ergo, the second largest firm in German life assurance. A few customers may reject the reduced choice but on balance sales should improve.
Munich Re is therefore increasing exposure to Ergo by raising its 62.5% shareholding to 95%. This recommended offer at 176 euros a share certainly isn't generous. But Munich Re clearly hopes Ergo shareholders will be so scared of the impact of new rules that reduce the index-weighting of companies with small free floats that they will accept its paper-heavy deal. That will leave Munich's surplus capital free for other acquisitions.
Overall, Munich Re suggests these transactions are positive for earnings as well as strategically appropriate. But without detailed numbers or even an analysts' briefing from this still-secretive institution, investors will see the deals as dictated more by Allianz's imperatives than by the prospect of return.
* * *
--Hugo Dixon, Antonia Feuchtwanger and Mike Monnelly
--------------------------------------------------------------------------------
URL for this Article:
interactive.wsj.com
Hyperlinks in this Article:
(1) breakingviews.com
(2) breakingviews.com
--------------------------------------------------------------------------------
Copyright © 2001 Dow Jones & Company, Inc. All Rights Reserved.
Printing, distribution, and use of this material is governed by your Subscription Agreement and copyright laws.
For information about subscribing, go to wsj.com
Used with permission of wsj.com |
