04 April 2019 by jbchevrel
I had commented (Mar 18 - ‘Stronger Together?’) on DB outperforming € financials (snr CDS -8bp sub CDS -20bp), when DB and CMZB started officially merger talks, after the German government signalled it wouldn’t oppose to it. Today we saw a partial reversal of that move, DB lagged (CDS +3bp) and its stock fell up to -2% intra day, as DB would reportedly need to raise €3-5B of fresh equity to finance the CMZB deal. Reuters reported just now that the ECB will ask DB to raise new funds for merger. DB shareholders have already been tapped c€30B over the past decade, but the DWS stake sale (<€5B) is not enough here. On the CMZB side of the equation, an alternative (and still unlikely) path showed up today. According to the FT, UCGIM is preparing a rival bid for CMZB should the DB/ CMZB merger talks fall apart. The plan would be to acquire a sizeable stake in CMZB and merge it with HVB, UCGIM’s German arm. That would probably be felt as negative for DB credit short term, if Q1 price action is any guide. But this path remains a tail risk, because such a UCGIM/CMZB deal would need approval from the German government, which has expressed reluctance towards a cross-border merger, as it prefers a German national champion. Actually, UCGIM had previously showed interest in such a deal in 2017, where it already faced political opposition. We should know rather sooner than later. Indeed, CMZB was said to decide on DB talks on next Tuesday (April 9 – regular management meeting), according to WirtschaftsWoche. And Suddeutsche Zeitung even reported that a preliminary decision may be reached as early as this weekend. Adding to this UCGIM/CMZB tail scenario, some German politicians (CDU Gutting and SPD members) said they didn’t favour the DB/CMZB deal because of job cuts. European elections are in less than two months, and we can feet it. But if anything, the UCGIM/CMZB tail scenario could mitigate this position, as the DB/CMZB deal would look like the ‘least worst’ option.