Deutsche, Commerzbank in tie-up talks

Goldman Sachs and Citi are helping Germany's two biggest lenders work on their potential $28 billion-plus merger, people close to the matter said on Monday. Deutsche Bank and Commerzbank confirmed on Sunday they are in tie-up talks following months of pressure from Berlin, which has pushed for a deal amid concerns about the health of Deutsche Bank.
Commerzbank is working with Goldman Sachs and Rothschild, as well as with law firm Hengeler Mueller, people close to the matter said on Monday. Deutsche Bank is working with Citi and also using its own in-house team of M&A advisers, according to Reuters Breakingviews. It is working with law firm Freshfields as well, people close to the matter told Reuters.
The banks and advisers declined to comment, except for Hengeler, which confirmed the mandate. German Deputy Finance Minister Joerg Kukies and Deutsche Chairman Paul Achleitner are former Goldman Sachs bankers. Investment bankers said several factors needed to be taken into account when assessing the best structure for any combination. In a straight takeover offer, Deutsche would likely have to offer a premium for Commerzbank's shares. It would have to mark Commerzbank's assets at market values, resulting in a significant capital hole.
That could be plugged with a capital hike of around 5 billion euros, or through a sale of Deutsche's asset manager DWS , bankers said. However, divesting DWS would mean giving up a steady stream of profits and go against Deutsche's goal of shifting its business away from volatile investment banking earnings.
"It's a high-return low-capital business, it gives them a great return and they want to hold on to it," one of the people said. Separately, a Deutsche-Commerzbank deal could also be set up with a new bank holding created, taking on both Deutsche and Commerzbank, or with a deal that sees Commerzbank merged with Deutsche's Private & Commercial bank.
The latter could be organised in a way that Commerzbank's shareholders retain a majority in the new retail and corporate bank, which would enable the lender to keep the tax benefit of being able to carry forward a large part of its losses. These are lost once more than 50 percent of its shares change hand. Issues around regulatory capital - and how to make use of the fact that Commerzbank trades well below book level, which can be used to boost such capital - also need to be addressed, as do other legal and tax issues, the people said.
"The main question is, however, will a merged bank be able to deliver on job cuts? Both Deutsche and Commerzbank have a terrible track record in this respect," one of the banker said, adding the main upside of any deal was the huge amount of potential cost synergies.