The scenarios regarding the break-up of the ( EUR, 0,00%) Group are starting to take shape.
The Belgian Federal Government is in favour of a scenario where the Belgain retail bank is nationalized whereas the other operating entities are sold. This would leave investors with an investment in the run-off book with c. € 21bn sovereign risk exposure and also additional exposure to Italy and Spain via Crediop and Sabadell. It implies that is being transformed into a fixed income hedge fund.
The Belgian reference shareholders can agree with this scenario with one big exception: they would like to see a spin-off of the Belgian retail bank towards the shareholders. This would leave them with an investment in a solid bank with a viable business model. They have some leverage to use on the negotiations. The Flemish region government has granted guarantees to Holding Communal (Dexia’s 14.3% shareholder) of € 450m to cover for these loans (mainly from Dexia), cover that is to be raised to € 1bn. If the Federal government wants to pursue its own scenario, than the Flemish regional government could lift that guarantee. This would trigger a default of Holding Communal (and potentially also Arco, 13.7% shareholder) and leave retail bank with a c. € 1.3bn claim on Holding Communal only covered by a collateral of shares.
Any acquirer of retail bank, be it the Federal government or an external acquirer would potentially incur a € 0.5 –1.0bn loan loss on Holding Communal.
Our View:
It is obvious that at this stage, it is virtually impossible to assess the valuation of the Group since we do not know what shape the group will take. A board meeting is to be held on Saturday. Meanwhile the shares will remain suspended until Monday, October 10.
Conclusion:
We maintain our Hold rating and € 2.0 target price which could change materially pending the outcome of the negotiations and the decisions to be taken in the coming days.