The German government has stepped in to salvage a multibillion-euro merger between two of the country's largest banks, Commerzbank and Dresdner Bank, with a €10bn (£9bn) cash injection.
The announcement, in effect a partial nationalisation of the combined group, came after several days of tense negotiations between executives from the two banks and state officials. "The government just couldn't afford to let this deal fail," one insider said.
Commerzbank had been under intense pressure to strengthen its balance sheet as it prepared to buy its loss-making rival. It is understood that the deal, agreed last year, would have collapsed had the government refused to invest through its Financial Markets Stabilisation Fund (Soffin). The merger is now expected to complete by the end of the month.
Commerzbank would have survived had the merger collapsed, but there was speculation yesterday that Dresdner would have had to be nationalised in full. Instead, the state will take a 25 per cent and one share holding – a minority blocking stake – in the "new Commerzbank" in return.
This brings the government's financial support for Commerzbank to €18.2bn in just over two months. On 2 November, Soffin injected €8.2bn through a "silent participation" – equivalent to preference shares in the UK – in a bid not to dilute the company's value. Yesterday's move involved a further €8.2bn silent participation, and a €1.8bn investment to take the 25 per cent stake.
The finance ministry set up the bank rescue scheme in October to stabilise the banking market. It put together a fund of up to €500bn to help struggling financial groups. It has already provided debt guarantees to three institutions: Bayerische Landesbank, IKB Deutsche Industriebank and HSH Nordbank. One bank to tap the fund was Hypo Real Estate Holding, which received a €50bn cash injection in October.
As part of yesterday's deal, Allianz, the giant German insurer that currently owns Dresdner, said it would put €1.45bn of new capital in Dresdner before the Commerzbank deal is completed. Allianz will also take €17.5bn worth of Dresdner's more risky assets on to its own books.
The capital injections will increase Commerzbank's core capital ratio, the indication of a company's solvency, to about 10 per cent, which will see it meet the tougher regulatory requirements in the wake of the credit crunch.
Martin Blessing, chairman of Commerzbank, said: "We are weatherproofing our bank for an economically stormy environment. This will enable us to fulfil our responsibility to offer loans to the German economy and to ensure we will continue to be a reliable partner for our clients."
The merger was first agreed in September, in a cash and shares deal valued at €9.8bn. The slump in global markets and two renegotiations of terms later, the deal is worth €5.5bn. "The rationale for the deal still makes sense in the long term," the insider added.
The merged company will overtake Deutsche Bank as the largest retail bank in Germany. The deal was initially expected to be carried out in two stages, with completion at the end of the year. But the renegotiations mean it will complete at the end of January.
The integration is already under way and the group is looking at cost-cutting, including headcount reduction, across the board. About 9,000 of the 67,000 workforce are set to go. In London, half of the 2,000 employees face the axe from Dresdner Kleinwort.