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Cerberus hellish German bank bet reaches early end

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Outside view of the Deutsche Bank and Commerzbank headquarters in Frankfurt, Germany, March 18, 2019. REUTERS/Ralph Orlowski

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LONDON, Jan 11 (Reuters Breakingviews) - Cerberus Capital Management is leaving Germany with its tail between its legs. The U.S. private equity investor late on Monday offloaded roughly two-fifths of its holdings in Deutsche Bank (DBKGn.DE) and Commerzbank (CBKG.DE) at a loss of around 20%. The poor payoff from a four-year investment highlights the difficulty of forcing change at large banks, as well as the limits of the group’s own strategy.

Run by co-Chief Executives Stephen Feinberg and Frank Bruno, Cerberus snapped up the stakes in 2017. Buying minority holdings in publicly listed banks looked like an odd move for a private equity group, but the trade had some logic. Deutsche and Commerz were trading with bargain-basement valuations of 50% and 40% of respective forward tangible book value at the start of that year. A potential rise in interest rates looked set to push up lending margins. And the prospect of a merger between the two offered tantalising cost synergies.

Yet monetary policy is now looser than in 2017, and Germany’s overbanked economy is just as tough for lenders. A merger was scrapped for being too complex, and both companies’ standalone rescue plans have been arduous. They now trade at roughly the same multiple of tangible book value as at the start of 2017.

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Cerberus struggled to make much of a mark on either lender. With a 5% stake in Commerz, and a 3% holding in Deutsche, the U.S. investor had little ability to shake up management, or steer strategy. A consulting agreement with Deutsche focused mainly on narrow areas like liquidity management, according to a person familiar with the bank’s operations. While Cerberus got its sought-for management change at Commerz, the 15% government shareholder seemed to hold sway. The chairman job went to Hans-Jörg Vetter, despite Cerberus having questioned his qualifications.

The timing of the exit also looks odd. Granted, Deutsche and Commerz shares have rallied recently, allowing Cerberus to limit its losses. But the market is not yet giving either credit for their turnarounds. Deutsche, for example, is targeting an 8% return on tangible equity this year, which argues for a valuation closer to 80% of tangible book value rather than the current 50%.

Perhaps Feinberg and Bruno doubt the targets. Alternatively, they may have to hand money back to their own investors: it will soon be five years since they made the outlays, close to the typical investment period of a private equity fund. Either way, it looks like a premature end to a painful investment.

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CONTEXT NEWS

- Cerberus on Jan. 10 sold a large chunk of its holdings in Deutsche Bank and Commerzbank.

- The U.S. investor offloaded about 250 million euros of Deutsche shares, reducing its stake to 2% from 3%. It divested roughly 190 million euros of Commerzbank shares, taking its holding down to 3% from 5%.

- Shares in Deutsche Bank were trading at 12.20 euros as of 0815 GMT on Jan. 11, or 27% lower than on Nov. 14, 2017, the day before the holding was first reported.

- Shares in Commerzbank were trading at 7.49 euros as of 0815 GMT on Jan. 11, or 31% lower than on Nov. 14, 2017, the day before the holding was first reported.

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Editing by Neil Unmack, Karen Kwok and Oliver Taslic. Graphic by Vincent Flasseur.

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