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DEXIA: Clash of shareholders?

DEXIA: Clash of shareholders?

7.10.2011 10:35

The scenarios regarding the break-up of the Dexia ( 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 Dexia Crediop and Dexia Sabadell. It implies that Dexia 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 Dexia retail bank with a c. € 1.3bn claim on Holding Communal only covered by a collateral of Dexia shares.
Any acquirer of Dexia 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 Dexia 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.

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.

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