Unveiling the Hidden Costs: BayWa's Overhaul and Its Impact on Credit Cooperatives
Time to Face the Music
Escalating Tensions in Baywa's Situation
By Stefan Kroneck, Munich
Looks like it's a rough ride for Baywa, folks. The latest bombshell dropped by the agricultural trading conglomerate—the planned axing of 1,300 full-time jobs, mainly in Germany, within IT, and administration—is just the tip of the iceberg. Since July 12 when the Munich-based company admitted it needed a restructuring, we've been swimming in a sea of negative news.
The current management and supervisory board have shoulder-rolled the responsibility for Baywa's rocky situation. This ailing, money-losing, and debt-ridden titan is being steered into calmer waters via a painful shedding of employees. However, these job cuts may stir up murky waters during the anticipated negotiations between management and the works council.
Growing Job Cuts on the Horizon
Baywa's leadership points to their 8,000 domestic workers as the benchmark for the yet-to-be-determined job cuts, representing a painful 16% of the core workforce. But let's not forget about the employees overseas, and those employed through majority stakes, which total more than 15,000. With a global workforce of over 23,000 people by the end of 2023, the final tally for job losses is expected to be far more grueling.
As Baywa continues its transformation, agreeing on deconsolidation effects with its creditor banks and credit cooperative shareholders, workforce reductions will likely extend beyond the current 1,300 planned cuts. The renewable energy project subsidiary Baywa r.e., also reeling from financial troubles, boasts approximately 4,000 employees. This division is expected to be marginalized during the restructuring, which suggests a likely spin-off from the 51% stake.
Saying Goodbye to the Pear at the Core: Shedding Baywa r.e.
A potential barrier to a sale could be the flooded market with cheap Chinese products due to the extremely tense market situation. Liquidating the company on its own would involve the highest risk possible, as it would result in significant additional costs, which Baywa may not have a crystal-clear view of yet. Still, one thing's for sure: the credit cooperatives, the biggest shareholders, will bear almost the entire burden of these extra costs.
Bailing Out Baywa: Can German Credit Cooperatives Pass the Stress Test?
Thus far, the credit cooperatives have provided around €1 billion in liquidity assistance to Baywa. However, this assistance may not be enough to ensure the company's long-term financial stability. With the corporate consultants at Roland Berger suggesting a capital increase in the near future, the rough road ahead for German credit cooperatives includes significantly challenging financial and time commitments.
If the losses in the current quarter and the first half of the next 12-month reporting period reach the same magnitude as before, the cooperative banks would find a capital increase in the billions to be less than a pipe dream. By the end of September of this year, equity had shrunk to around €1 billion, making the need for a capital injection more urgent than ever.
Preparing for the End-of-Year Finance Report
By January 2025, we should have a clearer picture of whether BayWa's losses and cash burn have slowed down or picked up speed during the final quarter of 2024. Provided that provisions for staff reductions (severance payments) don't add excessive burden to the company, a temporary relief from creditor interest payments announced in the summer might mitigate some of the financial pressure.
There's no denying that the road to the planned completion of the restructuring by the end of 2027 will continue to be bumpy for BayWa. For the credit cooperatives, the risk of setbacks is high.
Credit Cooperatives in the Crosshairs: The Hidden Risks
- Financial Burdens: As major shareholders in BayWa, German credit cooperatives are on the hook for increased financial exposure throughout the restructuring process, which may involve measures like debt restructuring, equity dilution, or asset sales.
- Operational Challenges: Changes in BayWa's organizational structure could necessitate the adaptation of credit cooperatives' portfolios, potentially leading to changes in control or voting power dynamics.
- Long-term Obligations: The 2028 restructuring deadline indicates a lengthy transition period for credit cooperatives, putting a significant strain on their liquidity, governance, and strategic influence.
- Regulatory Requirements: The legal and administrative processes accompanying the restructuring plan may come with additional costs or obligations for shareholders, including compliance measures and potential legal representation.
- Governance Implications: Credit cooperatives may need to stay actively engaged in corporate governance decisions to protect their interests during the restructuring and ensure favorable outcomes.
- Shift in Compliance Standards: Aligning BayWa with EU regulatory frameworks may require updates to cooperative shareholder strategies and adjustments in compliance measures.
In light of BayWa's restructuring, the financial sector, particularly the credit cooperatives, may face increased financial exposure due to potential obligations such as debt restructuring, equity dilution, or asset sales. Moreover, changes in BayWa's organizational structure could necessitate the adaptation of credit cooperatives' portfolios, potentially leading to long-term obligations, operational challenges, and changes in control or voting power dynamics.
