In late May, Fortis CEO Jean-Paul Votron appeared relaxed and confident during an interview in the Belgian bank’s new 17th-floor offices in the heart of London’s financial district. A few days earlier Votron had presented investors with an upbeat view of progress on Fortis’s €24 billion ($37.6 billion) purchase last year of ABN Amro’s Dutch retail and asset management businesses as well as its European private clients businesses.
But as senior executives at Bear Stearns Cos. learned, a lot can change in a short period of time when in the throes of a global credit crisis.
On June 26, Fortis announced it would need to raise more than €8 billion to address solvency concerns and stem rising acquisition-related costs. The immediate moves included a dilutive €1.5 billion equity raising to absorb losses on the forced sale of some Dutch commercial businesses and to buy out 51 percent of a preexisting ABN Amro insurance joint venture. Fortis is also doing a sale and leaseback on €1.5 billion of real estate, issuing €2 billion in new bonds and selling another €2 billion of noncore assets to reinforce capital and maintain a core tier-1 ratio above 6 percent through 2009, when Fortis will integrate the remaining ABN Amro assets.
But it was the decision to cancel its €0.59-a-share interim dividend — to save €1.3 billion — and cut the proposed payment of its final dividend in shares that really infuriated shareholders. “It’s a mortal sin for a company like Fortis to say nothing is wrong and then to have to raise new capital and cut the dividend,” one Dutch investor tells Institutional Investor.
Fortis’s shares, already down nearly 60 percent on the year, lost a further fifth of their value after the announcement and even traded below the €10 discounted price of the newly issued shares. Shareholder groups were furious; Belgium’s shareholder association, VFB, called for the ouster of top executives, while Dutch shareholders lobbied to force an extraordinary general meeting. Jan Maarten Slagter, director of the Dutch investor association, says: “The trust between shareholders and management is badly damaged. ”
It all seemed so promising a year ago. Even at ABN Amro’s very full price, few doubted that Fortis needed these assets, and in late May, Votron insisted ABN Amro was worth every cent. “We had a suboptimal position in retail in the Netherlands, and we could improve that,” he said. “We wanted to get bigger in the private banking world, and ABN Amro was our competitor. And we wanted to grow asset management with a view to the future potential of Asia.”
The acquisition gave Fortis a 30 percent share of its home market in Benelux, doubled its asset management business, created a top three European private bank and established a platform to cross-sell banking, investment and insurance products. Despite falling behind on its own timetable for delivering savings, the bank seemed to get most of its acquisition funding through a €13.2 billion rights issue, €5 billion of equity-linked securities and the sale of assets. Votron even engineered an investment in Fortis’s asset management business in March, bringing in €2.15 billion from China’s Ping An Insurance Co.
But Ton Gietman, an analyst at Petercam Securities in Amsterdam, says financing part of the deal through hybrids proved disastrous. “To be on the safe side, they should have issued more equity,” he says.