Investing in German housing is usually boring, predictable and lucrative. But when it comes to mergers and acquisitions, it can turn into a hazy neighborhood.
Frankfurt-listed residential owner Vonovia moves closer to roughly $ 22 billion takeover of counterpart Deutsche Wohnen.
The latest version of the deal is Vonovia’s third attempt to buy out its smaller competitor and looks likely to be successful. It will bring together the two largest listed real estate companies in Europe in terms of market value to create an industry giant rivaling the largest US real estate investment trusts in terms of scale.
But the acquisition has raised the mouth of some shareholders, including the New York hedge fund Davidson Kempner, which has held a stake in Deutsche Wohnen for three years. An initial offer collapsed in July after failing to meet the 50% approval threshold. The bidder responded by slightly increasing their bid and later removing the threshold. Unlike in the US or UK, this is legal under German rules for voluntary takeovers, which give the bidder discretion over the bar.
Deutsche Wohnen’s board of directors also agreed to issue primary shares without pre-emptive rights and sell them directly to Vonovia if she needed help closing the deal. It turns out that this deliberate dilution of existing shareholders won’t be necessary: On Monday, Vonovia said it now owns just over 50% of Deutsche Wohnen’s shares. It was the first time that such a tactic had been considered in a German takeover and raised a red flag for investors.
There was an easier way to win over the shareholders of Deutsche Wohnen: to offer them more money. Vonovia seems to be getting a good deal. Target’s share was weak before the offer due to a Berlin rent freeze that was eventually canceled. Vonovia’s offer implies a portfolio value of 4% lower than where real estate analysis firm Green Street believes Deutsche Wohnen’s assets would be traded on the private market. Several shareholders say they would have backed a deal if the price was a little higher than the current offer of € 53 per share, equivalent to $ 61.99 per share.
German residential real estate has been a good bet in recent years. Over the past five years, Vonovia and Deutsche Wohnen have both generated annual returns to shareholders of around 14%, compared to 9% for the German DAX index.
However, this is not the only example of weak governance in the sector. At the end of 2019, another German residential owner, Adler Real Estate, bought a 33% stake in competitor Ado Properties and installed new members of the board of directors. Ado’s board of directors then announced its intention to take over its new prominent indebted shareholder, sparking spillover effects with Ado’s other investors. A previous bid by Vonovia for Deutsche Wohnen in 2015 also resulted in drama and suggestions that companies were not paying enough attention to shareholder interests.
Even after their strong performance in recent years, German real estate stocks offer the prospect of slightly higher yields than the US in terms of rental yield relative to local government bonds. The trade-off for investors may be that the safe haven in Germany feels a little less secure.
Write to Carol Ryan at [email protected]
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