Advent and Centerbridge’s bid for German Aareal Bank may be an example of better withholding dividends
Private equity groups pride themselves on spotting opportunities neglected by the Stock Market. Advent and Centerbridge’s offer of 1.7 billion for the German Aareal Bank may be an example of this. The council and management of the real estate bank, led by CEO Jochen Kloesges, recommended on Tuesday the offer of 29 euros per share in cash, 23% on the closing prealterations. The purchasing barons want to keep Kloesges and give him capital to grow the loan portfolio and the Aareon real estate IT division, against the current plan, which calls for a payout up to 80%.
Suppose the new owners use that money to grow the portfolio to $ 40 billion in five years, from $ 29 billion, and they get a net interest margin of 2.2%, and they raise IT revenue at a compound annual rate of fifteen%. Revenues in 2026 would be 1.4 billion. If costs fall to 55% of revenues, from the current 60-odd, and delinquencies return to prepandemic levels, 2026 profits would be 320 million, more than double the 127 million in 2022, according to Refinitiv.
If Aareal is valued with a multiple of 12 times, its five-year average could be worth 3.8 billion, which would give buyers an IRR of 17%. Advent and Centerbridge could probably raise that number by cultivating and then selling the IT business – Citigroup estimates it alone could be worth $ 2 billion in 2023.
Aareal shareholders may conclude that the buying barons are paying little, which perhaps explains why the stock was trading slightly above the offering price yesterday. The more general lesson is that investors in other banks should pressure management to grow the business, rather than focus on current dividends. This is especially true in a rate hike environment. Eurozone banks are trading at an average yield of 5.1% based on 2022 dividends, about 2 points above the Euro Stoxx 50. They may well be put to better use.