There's been a big song and dance made in Europe about the move by Commerzbank to buy Dresdner from German insurance giant, Allianz for around $US14.4 billion, or around $A16.8 billion.
It is a big, defining moment in European banking, but it involves an employee and asset rich bank that lacks profits because of the poor returns and intense competition in Germany from small local and state-owned banks and savings groups.
In fact the impending sale of St George Bank to Westpac is a far more strategic and better deal for all involved, with fewer staff and assets, but a superior profitability, and no exposure to subprime toxic mess.
Allianz is receiving a price of 9.8 billion euro in total (not quite but I will explain that) for an asset it paid 23.4 billion Euros back in 2001 and which has lost money off and on since (Its Dresdner Kleinwort investment bank is carrying around $3 billion in losses from subprime mortgage and other dodgy assets and Alliance will receive an investment company from Commerzbank worth 700 million Euros as part of the deal.
Allianz will be the major shareholder in the merged bank, with around 30% of the duo, which will be a lot better than 100% of a loss-maker or under-performer.
In fact the deal has every sign of being the once in a lifetime purchase: Commerzbank is being given every assistance by Allianz to buy the poorly performing Dresdner.
Allianz's shares have underperformed German and European market indices since buying Dresdner in 2001. Poor returns from insurance in the past year and the subprime mess and credit crunch have contributed, but it's been the earnings draining Dresdner that has hurt Allianz's reputation in the minds of investors.
Commerzbank will buy in two steps, initially acquiring 60.2% for cash and shares, and completing by the end of next year.
Commerzbank will transfer its Cominvest asset management unit, valued at about 700 million Euros, to Allianz which will in turn agree to cover as much as 975 million Euros of potential losses from assets held by Dresdner Kleinwort.
Up to 5,500 jobs could go, including 1,000 of those in London, at Dresdner Kleinwort which seems set up to take the brunt of the cost savings.
The deal gives Commerzbank a total of 11 million German retail clients; more than Deutsche Bank with around 9.7 million, but the profits are poor.
Strangely, all the stories on the deal failed to mention the low profitability at Dresdner. Its latest earnings were estimated by the Financial Times at around 300 million Euros, or approaching half a billion dollars.
Commerzbank says it will get an earnings boost from the purchase from 2011: that's a 'charity' deal and no bank or Australian group would be allowed to get away with such an earnings dilutive deal.
The Westpac-St George is being done in a ratio of 1.31 WBC shares (worth just under $A31) for every St George share (worth yesterday around $30.40). That's a value of $16.1 billion on a bank with probable 2009 earnings of well over $A1 billion.
Commerzbank had earnings of 1.9 billion Euros, making around 2.2 billion for the combined banks, or around $A3.7 billion on assets of 1.1 trillion Euros.
A combined Westpac/St George would have earnings of more than $4.5 billion on assets of around half that figure for Commerzbank.
We might have a banking oligopoly here but when it comes to creating value, it happens here.
The mooted Westpac-St George merger says a lot about which banking system is strong.
The big problem in Germany is the continuing strong influence of state and local government owned banks which act un-commercially and which often have to be bailed out: there have been three bank bail outs so far in the credit crunch in Germany.
Two were state-owned banks, and a third was controlled by a state owned finance agency.
Another state-owned bank has also been bailed out but that is also related to trading losses not associated with the subprime mess, as well as subprime-related losses.
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