Risks seen in drawn-out Commerzbank-Dresdner deal

The building of Dresdner Private Banking is pictured in Geneva August 5, 2008.

FRANKFURT (Reuters) - Commerzbank's (CBKG.DE) $14.5 billion takeover of Dresdner Bank faces challenges not only from slowing economies but from a drawn-out sale process which will leave seller Allianz (ALVG.DE) with a big stake.

Analysts say the sale in two stages means no clean break from Allianz, which could further complicate the fusing of two banks of similar size, while the deal's financing remains iffy.

Germany's No. 2 lender is paying 9.8 billion euros for loss-making Dresdner, which Allianz tried for seven years to turn around before selling it for less than half what it paid in 2001.

The deal is aimed at creating a group to rival flagship German lender Deutsche Bank (DBKGn.DE).

Allianz drove a hard bargain, extracting more money for Dresdner than analysts had expected and scooping up Commerzbank's asset management business as part of the deal.

"The acquisition price is relatively high and the change in the business mix does not seem fully convincing in strategic terms," said UniCredit analyst Andreas Weese in a research note.

The purchase, which may take more than a year to complete, will require Commerzbank shareholders to approve a capital increase after they already turned down some of Commerzbank's proposed capital measures earlier this year.

Shareholders gave a thumbs-down to the deal unveiled on Monday, sending Commerzbank's share down nearly 12 percent.

Allianz was also given only a lukewarm reception, with its share up only fractionally and lagging European insurance shares .SXIP.

Slashing duplication and overhead will be a major focus of the merged bank, with Commerzbank saying it aimed to cut almost 2 billion euros in costs by eliminating 9,000 jobs, a plan that services union Verdi warned required close scrutiny.

Bank mergers that have focused on cost synergies in the past have often lost sight of the need to boost revenues, as management attention turns to survival before sales.

Allianz bought Dresdner Bank for 24 billion euros in 2001, hoping to sell bank accounts to Allianz customers as well as products such as car insurance over the counter at bank branches. Instead, Dresdner racked up losses of more than 3 billion euros after the cross-selling floundered.

One Dresdner executive predicted uncertainty in the months ahead: "You are going to have the Commerzbank people there telling you what to do as well as your old boss.

"And everyone is going to be looking for a new job," the executive said, adding that the merger is coming in the middle of Dresdner's budget process for the coming year.

While some analysts lauded Commerzbank's track record in integrating takeovers such as property financier Eurohypo, the size of the Dresdner deal overshadows previous experience.

"There are high execution risks, and we keep our doubts on Dresdner's underlying profitability," said UniCredit's Weese.

The merger of the country's second- and third-biggest lenders in the commercial banking sector will do little to shake the dominance of Germany's not-for-profit savings banks, which control about two-thirds of the country's banking market.

The merged bank's focus on corporate customers also comes as Europe's biggest economy is facing a sharp economic slowdown, with non-performing loans to companies expected to rise amid growing worries about the commercial real estate market.

NOT WITHOUT RISK

Speculation about an exit from banking through the disposal of Dresdner has boosted Allianz's share in recent months but the insurer will remain highly exposed to banking through the nearly 30 percent stake it will hold in the merged bank.

Analysts said the impact of Allianz's 30 percent stake in Commerzbank would remain the biggest unknown near-term.

The size of the stake could add volatility to Allianz's earnings in the future, even as the insurer cedes control over the merged bank to Commerzbank's management, analysts said.

"A 30 percent ownership stake is unnecessary in the long term," Deutsche Bank analyst Spencer Horgan said in a note to clients, adding that he expected the insurer to sell off the stake over time.

Commerzbank said it would sell exclusively Allianz insurance products through its bank branches in the future. Commerzbank's current sales pact with Italian insurer Generali (GASI.MI) is due to expire in 2010.

Only about 4-5 percent of Generali's new business in Germany was generated through Commerzbank, but analysts said the sale of Commerzbank's Cominvest asset management activities to Allianz would deprive Commerzbank of some banking products that competed directly with insurance policies, giving Commerzbank greater incentive to push insurance sales in future.

(Editing by Jason Neely)