Hypo Alpe Adria – The Final Rip-Off
Look who is lurking again behind the corner – the tandem of Advent International and Deutsche Bank, respectively the buyer of the Bulgarian Telecom Company in 2004 and the advisor of the Bulgarian government in the sweetest deal of the past decade, seem to have teamed up again, in the same capacities, to do the sweetest deal of this decade – the final rip-off of the Austrian state, in the re-privatisation of Hypo Alpe Adria.
When in early 2013 the Austrian Government set off to finally resolve and end once and for all the long-lasting drama around the troubled Hypo Alpe Adria Bank, it seemed that it had picked the most reasonable (or the only reasonable) strategy – to stop the leakage of tax payers' money, to guarantee the repayment of the funding extended so far and to ensure that as much as possible of the Hypo’s network will survive and continue to operate. To achieve this challenging task the patient needed some radical treatment – some mighty dose of toxic loans accumulated during the ill-managed growth of the bank needed to be brushed out into a so-called “bad bank” unit and any “healthy” parts to be seriously restructured and sold to the best bidder who would guarantee the repayment of the public funds invested to keep the ailing bank alive.
It seemed that the strategy started to work really well – a new management was installed that initiated a serious restructuring program to improve the operational performance of the Bank despite the severe limitations imposed by the European Commission, an immensely complicated project to separate the toxic assets (the bad loans) was successfully implemented and the Austrian operations were successfully sold and under their new owner managed to turn around its fortunes.
The biggest challenge of all of course still lies ahead, to sell the “good” part of the bank’s core business in 5 of the successors of former Yugoslavia, where, over the last 10 years, it gained substantial market share generously funded by the Austrian taxpayer. To guarantee the repayment of this money (estimates put it between EUR 2.0-2.5 billion) is exactly the biggest political and financial challenge for the Austrian Government in this process and the intense public attention to that is no surprise.
The process of re-privatization of Hypo’s SEE subsidiaries in Croatia, Slovenia, Serbia, Bosnia & Herzegovina and Montenegro started back in early 2013 attracting a number of suitors, some more serious than others. Eventually, the Austrian press reports that only two bidders have reached the final round – the American hedge fund Advent International, and a consortium of the Bulgarian Via Group with Ukraine's 4th largest bank, Delta Bank, supported by the 2nd largest Russian banking group, VTB.
It seems that this is about where the good news end. Over the past 2 weeks, various Austrian press, most notably, an investigative piece in the reputable weekly Format, report that the Eastern European consortium proposed to guarantee the repayment of the public funds along with a long-term vision for the development of the bank’s business in their "home" region, yet the same reports name Advent as the preferred bidder that may be about to close the deal. The purchase price in the their bid, as reported by the Austrian Kronen Zeitung, will be “no more than EUR 100 million”, but most importantly the taxpayer will have to hope that the bank manages to raise sufficient funds from the market to repay their money to the Republic of Austria.
Given that this price is reportedly below 10% of the net asset value of the group (undoubtedly the cheapest banking deal of the century), the press reports further note that everyone (especially the opposition politicians) expects that the private equity fund will do what private equity funds do "for living" – value extraction, i.e. that Advent will liquidate some of the weaker performing subsidiaries, rebrand the others and sell them piece by piece. And make a bundle in the process – after all, why would the hedge fund managers get out of bed for less than a few hundred percent returns on their investment, especially when the Austrian taxpayer is happy to oblige.
And rightly so – a quick look back to some of the Advent’s deals in the region seems to reveal a pattern. Some 10 years ago, after a heavily politically influenced bidding process, Advent struck a deal with the Bulgarian Government and acquired 65% of the Bulgarian Telecom Company for EUR 260 million, promising in exchange for the low price to invest heavily, to lay off only 5,000 people and to pay 10% of any subsequent resale price in the next two years back to the Government. Only few months later Advent sold an option on all of its stake to an Icelandic private equity fund, for EUR 300 million. The negotiating team, relying on the robust advice by Deutsche Bank, forgot to capture the derivatives structure in the earnout provision.
A couple of years later, more than 9,000 people lost their jobs through various severance schemes, some key assets were sold off and the same stake in the company was resold for EUR 1.06 billion to AIG, valuing the company at over EUR 1.6 billion. It all ended in a long lasting legal battle of the Bulgarian Government claiming that Advent failed to meet its promises and that the option sale was just cover to minimize the claw-back payment. It begs a question whether it is a coincidence that the advisor to the Bulgarian Government for this deal was none other than Deutsche Bank, which is currently advising the Hypo deal for the Austrian Government.
Most alarmingly, according to the recent article published in Format, the preferred bidder may have been made some very unusual concessions – Advent is said to have asked and been granted a reimbursement of their due diligence costs in excess of EUR 1 million. This is reminiscent of the way the deal of the previous decade turned out when Advent flipped BTC for more than twice the price paid 3 years prior, and collected from the Bulgarian taxpayer a reimbursement of legal costs through the arbitration court. The Austrian treasury must already be very excited about the forthcoming long-term profitable relationship with Advent International.
So, in a nutshell, it seems that, at the end, Hypo is consciously being sold for scrap with no guarantee that the public money invested so far will ever be repaid and to top it all up, a bonus from the Austrian taxpayers to the prospective buyer for taking no risk at all. So much for the solid strategy it all started with. It seems that, as they say, the road to hell is indeed paved with good intentions!