German banks start to hire as growth returns
For mergers and acquisitions, Germany is a market of false dawns and big promises. But despite another poor showing in the first quarter and the failed initial public offerings of Siltronic and X-Fab, the big investment banks in Frankfurt are hiring again.
Frankfurt's 12 largest banks are on the recruitment trail, having reduced their total headcount from 800 to 410 since 2001, according to a survey conducted last month by Egon Zehnder, the headhunting firm.
Raimund Herden, head of German corporate finance and advisory at Dresdner Kleinwort Wasserstein, said: "Like other big markets, Frankfurt has been suffering in the last three years. Investment banks made considerable additions to their teams in the 1990s. This led to excess capacity when deal volumes fell, forcing some banks to reduce staff or retrench to London. Most banks are now hiring again."
The question is whether the M&A market is healthy enough to justify the headhunters' optimism. Florian Lahnstein, co-head of German investment banking at UBS Investment Bank in Frankfurt, sounded a note of caution. "UBS has just had its best-ever two months in Germany. However, the real growth areas are equity capital markets and debt capital markets, not M&A," he said.
German M&A has just endured another miserable quarter, with announced deal values reaching $15bn (€12.6bn), compared with $38bn in the UK, $91bn in France and $194bn in Europe, according to data provider Thomson Financial.
Private equity firms are propping up the market. During the first quarter, financial investors in German assets accounted for 27% of total German dealflow, more than double the European average, according to Thomson Financial. Herden at DrKW said: "We are working with an increasing number of financial sponsors on deals."
Holger Bross, a managing director of Goldman Sachs in Germany, said: "Private equity continues to be healthy in Germany. There remain a number of attractive non-strategic assets, which we expect to become available and which private equity firms are well positioned to take advantage of."
In the past four weeks, prospects have improved and Germany has set a healthy pace in M&A.
Last week, KKR, the US private equity group, and CSFB Private Equity teamed up with Rockwood Specialties Group, a US trade buyer, to acquire four Dynamit Nobel businesses from MG Technologies for $2.7bn. At the start of the month, RWE, the German power company, sold its 56.1% stake in Hochtief, a construction company, which tripled Hochtief's free float from 27% to 83%.
Henrik Schliemann, a managing director at Hawkpoint, said: "Restructuring is a big driver in the German market. Even large M&A deals such Mg Technologies sale of Dynamit Nobel are driven by restructuring, while the flotation of Hochtief also resulted from the overall restructuring of RWE. You can expect there to be continued fall-out from ongoing restructuring for some years to come."
The Dynamit Nobel consortium, which was advised by Lazard and DrKW, bought the four chemical and advanced materials units from MG Technologies, the German industrial group, in a deal financed by Credit Suisse First Boston, Goldman Sachs and UBS.
Two more of MG's businesses are also on the block. Bankers expect the sales of Solvadis and Dynamit Kunstoff, both chemicals businesses, to complete in the next month, which should yield a further €450m for MG.
This month, Kabel Deutschland, the private equity-backed German cable network provider, bought three rival cable network providers in a deal worth €2.7bn. Following the acquisition, Deutsche Bank, Morgan Stanley, Citigroup and Goldman Sachs also arranged €4bn ($4.8bn) of debt finance for Kabel Deutschland Group (KDG), one of the largest debt packages arranged for a European buy-out, to cover the acquisition and recapitalise the balance sheet.
KDG was acquired 15 months ago by Apax Partners, Providence Equity Partners and Goldman Sachs Capital Partners from Deutsche Telekom.
No deal in Germany is easy to achieve. Goldman Sachs advised Blackstone, the US private equity firm, on its €3bn take-private of Celanese, the biggest transaction of its kind in Germany, which has just completed. Blackstone had been working on the deal for two years.
Herden agreed: "While much of corporate Europe has unwound itself, the same is not true of Germany, where a number of conglomerates continue to exist."
Bankers acknowledge the lucrative nature of good relationships with private equity houses, which reward lending banks with advisory mandates. For example, the advisory banks on the Deutsche Kabel transaction were lenders or shareholders to the consortium.
DrKW's close relationship with Bain Capital has helped it to the top of German M&A league tables based on completed deals. Last December, it advised Bain on the €1.4bn acquisition of Brenntag, a chemical distribution company, and Interfer, a steel trader, in its seventh deal in 18 months. It is also understood to be advising Bain on a potential bid for Grohe, the German water systems provider,
Texas Pacific Group and CVC Capital Partners are also thought to be preparing bids. This deal also appears to have a long tail. Merrill Lynch won the mandate last September and is marketing the deal as a dual-track transaction. Merrill says the company is still undecided whether to float or sell the business, but bankers believe the febrile German IPO market, which has seen two issues pulled in as many months, may not be best solution. One banker familiar with the situation said: "The majority of dual-tracks end up as trade sales."
Bankers are waiting to see whether the apparent dawn of German M&A is false. Herden said: "Based on our own pipeline we are optimists. There will be no boom in the markets. But we are coming out of the plateau and have a steadily increasing dealflow."
