Investors make future of Fortis uncertain

Investors hope voting against the splitting up and dismantling of Fortis can result in a higher price for the company. But they are taking a big risk.

Angry shareholders have blown the whistle on the board. The investors consequently got their way, but there is a good chance they may have shot themselves in the foot on Wednesday.

The shareholders of troubled Fortis Holding voted on Wednesday against splitting up and dismantling the financial concern. They hope that new negotiations on the sale of divisions will follow, enabling them to ultimately get a better price. That is indeed a possibility, but there are far more scenarios that would signal further disaster for the already plagued Fortis shareholders.

It is certain that Fortis Holding is in danger of facing an acute deficit of funds. This is the stock market-listed Fortis which currently contains the international and Belgian insurance activities plus a stake in a portfolio of risky investments.

The Dutch Fortis Bank and the insurance branch were nationalised at the beginning of October. The shareholders also voted against this deal on Wednesday because they feel a higher price should have been paid. Dutch finance minister Wouter Bos has repeatedly said that the transaction was legitimate and he does not want to renegotiate. Various lobby organisations have since instituted proceedings against Dutch government with regard to this.

Possible bankruptcy

Court cases against Fortis will continue for a long time yet, especially ones brought by shareholders seeking compensation. The vote in Brussels on Wednesday mainly brought uncertainty. Officially the sale of 50.1 percent to the Belgian state may not go ahead now, nor may the government sell this banking division on to the French bank BNP Paribas. This actually means that Fortis has to pay 4.7 billion euros back to the state, money that it has already received and largely spent.

Fortis Holding itself denies that the veto by the shareholders reverses the sale to the government. “The contract was signed, the sale has been executed,” says a spokesperson. This does not refute the fact that the situation is a legal tangle however. The warning from interim president of the board of directors Jan-Michiel Hessels about a possible bankruptcy of the holding still resounds.

For the time being, it is a matter of awaiting the outcome of the shareholders meeting in the Netherlands. Three supervisory board members who were elected in Brussels must get a majority of the votes at that meeting as well. Only then can they take up their mandate and will the Belgian state have a ‘conversation partner’ at Fortis Holding.

The outcome creates a serious dilemma for the new supervisory board. Strictly speaking, the will of the shareholder cannot be followed because there is no money to do this. But going against the emphatic opinion of the majority of its owners does not seem an option either.

Walk away

The Belgian government will probably agree to renegotiate. Although there is not much chance that it will give the shareholders any gifts. Fortis is still a major employer in the country and the government will at all times want to prevent a run on the bank.

The attitude of BNP Paribas is unclear. In a short press release on Thursday, the French said only that they were glad that so many shareholders had voted in favour of the deal. Without the ‘no’ vote from Chinese insurer Ping An – a major shareholder with 4.81 percent of Fortis – there would have been a majority. Officially the original deal made in October is still valid until the end of February, but BNP Paribas can walk away without a penalty if Fortis fails to follow through on parts of the transaction. And that is precisely the situation that has now been created.

There is certainly a chance that the French bank will decide to walk away from the transaction. BNP Paribas, which for a long time seemed to be surviving the financial crisis unscathed, is now also facing tough times. The bank recently announced it expected a loss of 1.4 billion euros in the fourth quarter of 2008. The withdrawal of the French would result once again in a financing problem. The portfolio of risky investments would then largely be in the hands of Fortis, for which the holding would have to put 6.9 billion euros on the table.

Lastly Fortis could also lose its Belgian insurance division. These activities, valued at some 5 to 6 billion euros, are collateral for the government should Fortis Holding be unable to satisfy the conditions. There is a risk for the investor therefore that the bank and insurance division will once again be brought together, but this time as a nationalised company.