Following considerable media speculation about its future, WestLB has confirmed that it plans to sell its London-based principal finance unit. Johannes Ringel, chief executive at the German bank, said in an interview with Reuters that he had received some “very interesting enquiries” about the business, which is headed by Robin Saunders. “We are aiming to sell (the principal finance portfolio) and we can imagine lots of different options,” he said.
WestLB has reportedly retained Goldman Sachs to look at strategic options for the business, according to the Financial Times. The same report suggests that the bank would prefer to break up the unit rather than sell it as a going concern. Both Lehman Brothers and Citigroup are thought to be interested in bidding for the business.
Saunders has also long been linked with a bid for the business, and earlier this year had arranged financing to acquire the unit when it emerged that WestLB was planning a speedy sale. The FT reports that Saunders is still prepared to mount a buy out of the business. Sources estimate that between £100m and £200m of equity capital might be acquired along with an unspecified portion of the debt, possibly in the range of £2bn to £3bn.
The principal finance unit has struggled of late with a number of difficult investments, most notably the UK electrical equipment rental business BoxClever, which was responsible for E400m of the bank’s debt provisions in its most recent results. Ringel said that WestLB will retain BoxClever before selling it in “four to five years”. The unit’s most recent investment was the £430m acquisition of Odeon, the UK cinema group, from Cinven in March.
The business has attracted media interest for a number of reasons. Besides the alleged parlous condition of some portfolio companies, the supervisory board of WestLB commissioned an investigation into the investment and risk management policies at the unit after some at the bank suggested that it had failed to institute adequate internal controls. Stories that senior management had also been able to allocate equity in portfolio companies on seemingly preferential terms added to the speculation. And the fact that Saunders has become one of the most prominent women in the financial industry, participating in some of the largest financial sponsor transactions, has also encouraged considerable media coverage.
WestLB joins the growing list of financial institutions keen to reduce significantly its exposure to private equity. Just as Deutsche Bank encouraged senior management to buy out a significant portion of their direct private equity investment portfolio to create MidOcean Partners, so Japanese financial giant Nomura was happy to see its principal finance unit exit in a buyout led by Guy Hands to create Terra Firma Capital Partners. Compliance with new, stricter capital adequacy guidelines in the form of Basel II as well as a strategic decision to reduce exposure to what some top bankers have come to regard as an excessivey long term, opaque and risky asset class that is inappropriate to have on a bank's balance sheet are key factors in these moves.