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Activists, Including Cerberus, Take 6.9% Stake In Deutsche Bank

The Deutsche Bank story has evolved rapidly this morning: Bloomberg reports that Deutsche Bank had attracted a “new top investor” in the ongoing process of its endless restructuring, then Handelsblatt tweeted that Morgan Stanley acquired a 6.68% shareholding on behalf of activist investors.

The bank confirmed shortly thereafter that the new DB shareholder was Cerberus Capital Management, the New York-based private investment form with $40Bn AUM. Cerberus CEO, Steve Feinberg, owns 3% according to the report, although it’s not clear which parties own the other 3.86% acquired by Morgan Stanley at this stage.

Cerberus specializes in distressed investing which, obviously, is a perfect description of Deutsche Bank’s current circumstances. It was set up in 1992 by Feinberg and William L. Richter, currently senior managing director. Feinberg started his career as a trader at Drexel in 1982 and was described as “secretive” by the New York Times. He famously said to Cerberus shareholders.

"If anyone at Cerberus has his picture in the paper and a picture of his apartment, we will do more than fire that person. We will kill him. The jail sentence will be worth it."

As a major Republican donor, Feinberg became a leading economic advisor to the Trump presidential campaign. It also brags about the benefit of its high-level political connections on its website. Former Treasury Secretary, John Snow, is the firm’s chairman, while former Vice President, Dan Quayle, is chairman of Cerberus Global Investments. Some recent transactions complete by Cerberus include purchasing a controlling interest in Staples’ European operations, acquisition of ABC Group (a leading Middle East retailer, acquisition of GE Money Bank and the purchase of 80% of Avon North America (giving it nearly 17% of Avon Products Inc.). Europe's biggest bank does not seem like a logical progression, but neither was Cerberus' ill-fated acquisition of a controlling stake in GMAC before the financial crisis.

The company lists four investment strategies:

  1. Distressed securities and assets;
  2. Private Equity;
  3. Middle-market lending; and
  4. Real estate.

As we have discussed previously, it now appears that after several stalled attempts to restructure the bank, Deutsche CEO, John Cryan’s time is running out. Deutsche’s 3Q 2017 results confirmed that revenue growth was not only elusive, but the situation was getting worse. A week ago, we discussed Deutsche Bank’s decision to ramp up its leveraged loans business as part of Cryan’s desperate need for growth:

So if you were Deutsche CEO Cryan and you needed revenue growth and you needed it fast, what would you do? One thing is to identify a “hot” sector in capital markets with high margins and go all out for growth, never mind the risk. Which is exactly what Deutsche Bank is doing in the leveraged loan market.

It is unclear if that "other" famous DB investor, Qatar, is still involved, or if as some speculated, it was selling some or all of its DB holdings to shore up the blacklisted nation's sagging finances, despite earlier hopes of adding more to its DB stake. It is also unclear if that other embattled investor, China's HNA Conglomerate is part of the activist consortium.

In any case, it seems that investors, including Cerberus, are unhappy with the strategy Cryan is pursuing and the pace at which benefits are impacting the DB’s P&L. We don’t blame them and the pressure on Cryan is about to ratchet up dramatically. After the news broke, DB's shares reversed an earlier 3.2% loss to trade up as much as 1.1%. Commerzbank, in which Cerberus owns approximately 5%, pared a 4.9% loss to 0.8%. In Summer 2016, news was leaked that the two banks held negotiations about a potential merger. Besides turning around Deutsche Bank, it remains to be seen whether Steve Feinberg has a grand plan for the overdue restructuring of the German banking sector.