US DoJ vs. BNP (OTCQX:BNPQY)
BNP Paribas, the No. 1 French bank and a top-tier European institution, may have to pay the US Department of Justice more than $1 bn (rumors are up to $16bn) to resolve a criminal probe into allegations it evaded U.S. sanctions against Iran and other countries for years.
BNP's net result in 2013 was around €5bn ($6.8bn). Such a fine would reduce BNP's CET1 ratio by about 10%.
To cut a long story short, BNP would have to look for a fairly important amount of cash if the final settlement is north of $10bn.
BNP looking for cash?
Rather than issue shares, BNP would be keen, for instance, to dispose some non-core assets. Guess what? Its main non-core asset, in our view, is a 22% stake in Klépierre (OTC:KLPEF), the No. 2 European shopping center operator.
Already two years ago, when new Basel III rules were to become effective, BNP decided to dispose a 28.9% stake in Klépierre (with a one-year lock-up period on the rest) in order to be able to deconsolidate the real estate company from its accounts and to improve its solvability ratio. The buyer of this stake in March 2012 was Simon Property Group (SOG), a leading US shopping center operator. It is clear evidence, if needed, that Klépierre is non-core to BNP.
Simon Property Group, a natural buyer of BNP's stake in Klépierre
Two years after its first investment, we think Simon Property Group would be keen to accelerate the process to integrate Klépierre and maximize synergies. Klépierre would be an excellent platform for SPG to develop outside the US (at least in Europe): Klépierre is present in a dozen countries in Europe. SPG has very recently spun off its strip centers and small malls into a newco (Washington Prime Group) whereas Klépierre disposed its smaller centers/malls to Carrefour (for €2bn; $2.7bn). They are now both focusing on the same kind of assets: big shopping centers in dense areas with high potential/strong purchasing power.
At the current share price, the BNP stake in Klépierre is valued at €1.6bn ($2.2bn). If SPG buys the BNP stake in Klépierre, we think the US real estate company would have to launch a public offer on the rest of the capital, i.e. 49%, which would be valued, at current share price, at €3.6bn ($4.9bn). In total, the max. cash-out for SPG, if it pays a premium of 20% on current share price, would be €6.2bn ($8.4bn)… a level that looks manageable for a company with a $55bn market cap, a yearly FFO of about $3bn and total revolving credit capacity of $6bn.
One could even imagine a co-investment with minority shareholders (insurers, pension funds) looking to be exposed to European commercial real estate (which could also help to maintain the SIIC / REIT status).
Klépierre's valuation looks quite fair in case there is no move on the capital structure: The price/NAV ratio for 2015 is at 1.17x (Unibail at 1.28x, best in class in Europe), and Price/Cash Flow 2015 at 17.7x, in line with European peers.
Risk: what happens if BNP keeps its stake in Klépierre?
Klépierre's strategy is to focus on bigger centers in Europe. The company has a strong pipeline of €3bn and we expect a dividend yield of 4/4.5%.
Klépierre's strategy is totally viable on a standalone basis and, in case of a recovery in Europe and better consumption trends in France, Spain and Italy (3/4 of the cash flow), Klépierre would be a nice investment.
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