Western Europe: Millennium’s new CEO seeks a fresh start

Towards a new Millennium

MILLENNIUM BCP, PORTUGAL’S largest private sector bank, is hardly alone these days in having to turn cap in hand to its shareholders for cash to repair its balance sheet. But whereas most of the banks that have gone begging recently have been victims of the sub-prime crisis, BCP’s riches-to-rags story has nothing to do with bad lending decisions or dodgy credit instruments. The story behind its bargain basement rights issue, planned for this month, is largely about equity – dodgy equity raisings, bad equity investments, a tumbling share price, disastrous M&A misadventures, management excess and a struggle for power in the boardroom.

But the election of an entirely new board in January and the announcement of a rights issue in April mark a turning point in the history of the bank and a chance to start afresh. Shareholders nursing losses on their investments, however, will want to see results soon.

"It takes a fight between two mother-in-laws to learn the whole truth," says the CFO of a leading Portuguese bank, translating a local expression. "BCP had always enjoyed a reputation as a national champion. Portuguese felt proud to have a bank that was expanding internationally and being taught as a case study at Insead. But it always seemed strange how the management could determine the whole life of the bank with such a free hand. It might be completely normal in a bank with a market cap of €100 billion but it’s almost unheard of for a €10 billion bank in a small country to be without a large shareholder that calls the shots."

In the case of BCP, it took a fight between the former chairman and former chief executive for the whole truth to come out. What emerged were secrets that would ultimately cost the jobs of everyone on the board and a national icon its reputation.

People familiar with the relationship between Jardim Gonçalves, BCP’s founder and former chairman of the supervisory board, and Paulo Teixeira Pinto, chief executive between 2005 and 2007, say the two men were almost like father and son. They saw eye to eye on many issues and shared common values, both being members of the ultra-conservative Catholic organization Opus Dei. The younger man, Teixeira Pinto, owed his position as chief executive to Gonçalves, who had personally picked him for the job ahead of more obvious candidates.

Tensions began to emerge between the two, however, when Teixeira Pinto’s attempts to cut the bank’s bloated cost base and a series of bungled M&A deals stretched the relationship to breaking point.

BCP had just seen its revised €5.32 billion hostile bid for BPI, Portugal’s third-largest private sector bank, rejected and Teixeira Pinto was keen to raise the bank’s offer a second time, in order to avoid a repeat of the Banca Commerciala Romana debacle, in which BCP lost out on its bid for the leading Romanian bank by a mere €50 million and was heavily criticized as a result. Gonçalves, however, was opposed to the idea and wanted to consider BPI’s counter-offer for BCP, although issues of management control, the exchange ratio and sensitivity surrounding the influence of Spanish bank La Caixa at BPI ultimately made that deal unacceptable too.

Frustrated by the chairman’s tight grip on the reins, Teixeira Pinto set about courting some of the bank’s shareholders to solidify his personal powerbase, setting the stage for a confrontation with Gonçalves, who was enraged by the perceived betrayal.

"Teixeira Pinto decided to go his own way and tried to set up a core group of shareholders that would give him the backing he needed to ‘kill his father’ at the next AGM," says a banker familiar with the situation. "When Gonçalves found out he made it his goal to get rid of him."

Power struggle

The dispute became one about the relative power of the supervisory and executive boards of the bank. Gonçalves, backed by long-time shareholders including construction company Teixeira Duarte and European insurer Eureko, wanted to increase the power of the supervisory board and make it even harder to alter the bank’s highly restrictive voting rights by raising the threshold from 66% to 75%. Teixeira Pinto, on the other hand, wanted to get rid of the general and supervisory council, headed by Gonçalves, or to expand its membership from 11 to 24, which could give him the upper hand.

Teixeira Pinto’s supporters included the colourful and controversial activist investor Jose Manuel Rodrigues "Joe" Berardo, who has built an almost 7% stake in the bank.

Rumoured to be one of the richest men in Portugal, Berardo is a prominent investor who made waves with his activist style in Sonaecom’s attempted takeover of Portugal Telecom in 2007 but is widely derided by Lisbon’s elite circles for his flamboyant personality and poor grasp of Portuguese, a result of his having left his native Madeira at the age of 16 to make his fortune, starting with gold in South Africa.

Berardo lived up to his reputation for activism at BCP by, among other things, pushing for greater transparency about executive compensation. Before Teixeira Pinto became CEO, BCP board members had been earning an average of €3 million a year, about three to four times as much as board members at other Portuguese banks, despite the bank’s poor share price performance, and had grown used to an extravagant lifestyle of private jets and bodyguards. They had also proved stubbornly resistant to attempts to lower their pay, winning increases in fixed compensation that substantially offset a cut in their bonus allocations. In the hostile atmosphere generated by the fight at the top of the bank, it did not take long before the digging around senior executives’ pay led to the discovery of skeletons in BCP’s closet.

The first scandal involved allegations that BCP had made illegal loans to the son of Jardim Gonçalves of about €12 million. These are now the subject of an investigation by the Portuguese regulatory authorities.

The second and most damaging allegation, also the subject of an official investigation, was BCP’s alleged undeclared use of a series of offshore companies that traded in its own shares in capital raisings that now appear less successful than they did at the time.

BCP had been forced to raise close to €2 billion in equity between 2000 and 2002 to fund a number of small acquisitions and to repair a capital base that had been significantly diminished by a share price collapse from €5 to just €1 as the bank suffered losses of hundreds of millions of euros on its investments in Eureko and in Portuguese telecom company ONI and charged the goodwill on its acquisitions against equity. This practice had the advantage of allowing the bank to continue to report robust profits and so earn its board members their substantial bonuses. However, it led to a multi-billion euro discrepancy between the bank’s results as reported in Portugal and as reported in the US, where it had an ADR programme and where US accounting rules required it to amortize the goodwill. During this time the bank relied heavily on its most loyal shareholders, who were predominantly clients or suppliers of the bank. The management of the time enjoyed a cosy relationship with these shareholders, who remained supportive despite years of poor share price performance as the relationships were supported by cross-shareholdings, sometimes indirectly via the bank’s pension fund, and preferential lending policies. Lending money to shareholders at favourable rates was a practice so engrained at the bank that it was for a while even extended to retail investors.

Thanks to such firm support, Gonçalves and his allies won the first round, kicking Teixeira Pinto out of the bank in August 2007 and replacing him with loyal acolyte Filipe Pinhal. But the damage to Gonçalves’ reputation had already been done and by December the pressure of the authorities’ investigations into BCP’s illicit loans to his son forced him too to leave the bank, with his once golden reputation severely tarnished.

BCP’s newer shareholders, unbeholden to the old guard, continued to fight, putting the pressure on Pinhal over the offshore share trading scandal. Worried by the damage to the country’s reputation and that of one of its most important banks, Vitor Constâncio, governor of the Bank of Portugal, stepped in, urging shareholders to seek a clean break with the past by appointing an entirely new board, effectively barring existing members from standing. Pinhal and other board members grudgingly withdrew their candidacy for a renewed mandate and BCP’s shareholders rallied together to almost unanimously vote in a new executive team in January headed by Carlos Santos Ferreira, until recently the chief executive of state-owned bank Caixa Geral de Depósitos (CGD), Portugal’s largest bank.

Santos Ferreira, BCP’s third chief executive in five months, has already begun to use all the diplomatic skills for which he is known to unite shareholders around the bank’s new strategic plan and to launch a much-needed rights issue. People who’ve worked with him believe he’s an excellent candidate to smooth things over at BCP, having performed a similar feat at CGD roughly three years ago when he took over as the third CEO in two years. He is known to shun the spotlight, not even turning up at the annual general meeting that elected him.

Cost of failure

BCP’s 2007 results, which were delayed to allow the new management team time to get involved, showed the effects of the year’s misadventures and infighting. The cost of the bank’s failed bids for rival BPI and defence against BPI’s own failed counter-bid amounted to €103 million, with BCP suffering an additional €80 million impairment on the value of its substantial stake in BPI.

BCP’s new management also wrote off €300 million of the bank’s equity to more accurately reflect the true economic substance of the offshore transactions being investigated.

Worryingly, the bank has also started to slip at home, where the damage to its reputation has been greatest. Rival banks, particularly Banco Espírito Santo and BPI, have been gaining market share across a range of products at BCP’s expense. The bank’s consolidated net income in its core Portugal business, excluding exceptional items, fell 14.6% although operating income held up better, falling just 1%.

The bank’s core tier 1 capital ratio fell to just 4.3% from 5.48% the previous year, forcing BCP’s new management to announce a rights issue of €1.3 billion, fully underwritten by Merrill Lynch and Morgan Stanley.

"The new management’s most important task is to restore the bank’s image," says Andre Rodrigues, an analyst at CaixaBI, a leading Portuguese investment bank. "The appointment of the new team and the capital increase are a new beginning for BCP. It is a real turning point for the bank."

With many shareholders, particularly the newer ones including Berardo, nursing heavy losses on their investment in the bank and with a number of important shareholders themselves strapped for cash, BCP announced this April that the three-for-10 rights issue would be priced at just €1.20 a share, a hefty 45% discount to the bank’s share price at the time of the announcement.

The discount seems to have been generous enough to entice shareholders to participate, as most have indicated their intention to take up their rights. Sonangal, the Angolan state oil company, for one seems keen on its investment in the bank, having increased its participation to 5.2% in March before the rights issue was announced. Sonangal also owns 49.99% of BCP’s Angolan operation, Banco Millennium Angola. Hong Kong billionaire Stanley Ho, who knows Santos Ferreira from his Macau days, is another cash-rich foreign investor who is expected to take up his rights in full via his Tan Ho vehicle, which owns about 3% of BCP.

The subscription period ended on April 24 and the new shares were scheduled to begin trading on May 6.

International attraction

As well as using the capital raised to shore up its balance sheet, the new management hopes to use it to invest significantly in its international businesses, which are increasingly among BCP’s most attractive assets. Total revenues from the bank’s international businesses, which include operations in Poland, Greece, Mozambique, Angola, Romania and Turkey, rose 40% in 2007 to €112 million, accounting for 19% of the group’s net profit. Growth in Poland and Greece were particularly impressive, with net income rising 53.5% and 46.5% respectively.

Rather than sell some international assets and focus on improving efficiency and shoring up the bank’s position at home, as most analysts had expected it to do, BCP’s new management is emphasizing international expansion as part of its ambitious new business plan to generate a net income of more than €1 billion by 2010.

The bank plans to allocate more than two-thirds of its capital to its international businesses in high-growth countries, opening 150 new branches in Poland and 235 in its other international markets. Management also told analysts that it hoped to double its aggregate net income in Poland and Greece by 2010.

Although the Polish and Greek franchises are now doing well, BCP’s detractors say that its track record in international expansion is chequered, since the bank paid substantially for its assets, and that despite their potential, the domestic franchise is still worth 90% of the bank’s value.

Further M&A deals are off the table for the moment.