Adler bids for Westgrund in latest German resi tie-up

Listed German housing firm Adler Real Estate has secured the takeover of a majority of peer Westgrund in what is set to be the third major M&A transaction in the country's listed housing sector in the past three months.

Hamburg-based Adler Real Estate said on Tuesday it has received backing from Westgrund's anchor shareholders - representing over 50% of the company's capital - for its voluntary cash and share takeover offer, paving the way for the creation of the fifth-largest listed residential real estate company with 52,000 flats in Germany.

Under the bid, Adler is offering a mix of cash and new Adler shares, effectively valuing Westgrund shares at €5 a piece. This represents a 5.4% premium to the closing price of the shares on the day prior to the announcement and a 20% premium to the average share price over the last three months.

The transaction is scheduled for completion by mid-2015.

'The takeover of Westgrund offers the opportunity to generate considerable potential for synergies amounting to €20 mln over the next three years,' said Axel Harloff, CEO of Adler Real Estate.

Adler and Westgrund have similar business models and their tie-up had been suggested by analysts in the past.

Adler currently owns and manages over 31,000 units following the purchase in October of a majority stake in housing association Jade in Wilhelmshaven, northern Germany (6,750 units) for around €200 mln.

Westgrund owns and manages over 18,000 residential units following the acquisition in July last year of the Phoenix portfolio comprising 13,300 units from Berlinovo, which is majority-owned by the state of Berlin, for €390 mln. It has also recently secured the acquisition of a further 2,700 apartments.

'We are very pleased with the opportunity of carrying out this acquisition for our shareholders as it offers an excellent fit,' Adler's Harloff added. The new combine will have a balance sheet total of €2.7 bn and a market capitalisation of €700 mln.

Synergy potential
The operation offers 'considerable potential for synergies' running to about €20 mln over the next three years, Adler said. Synergies are expected from an asset management perspective especially in the states of Lower Saxony, North Rhine-Westphalia, Berlin, Brandenburg and Saxony. Further economies of scale are possible in financing, housing management, purchasing and portfolio management, as well as rental-related services, leading to general synergies.

Oddo Seydler Bank advised on the deal.

Wave of consolidation
The German residential market is witnessing a trend towards consolidation because of the cost benefits, according to market experts.

‘Companies have reduced their inherited debt piles since their IPOs in 2005-2007, refinanced their debt at much better conditions, so they can now pay higher prices,' says Konstantin Kortmann, national director and team leader of residential investment at JLL in Germany. 'Subsequently, we’re likely to see further consolidation in the sector going forward,’ he added.

Adler's announcement is the latest in a string of M&A deals in the German listed housing sector. It comes only a day after Deutsche Wohnen, Germany's second-largest listed residential firm with 147,000 units, unveiled plans to acquire Austrian peer Conwert in its second major M&A deal in the past 18 months.

Deutsche Wohnen, which in 2013 took over rival GSW in a €1.75 bn all-share deal, is now seeking to further cement its position by unveiling plans to take over Conwert at €11.50 per share - a deal which values the Austrian company at about €1 bn.

Earlier this month, Germany's largest residential landlord, Deutsche Annington, closed its €3.9 bn takeover offer of Gagfah. That deal is set to create the largest listed residential landlord in Europe with a portfolio of some 350,000 flats worth around €21 bn.

Deutsche Wohnen's offer represents a premium of about 21.5% over Conwert's average share price over the past six months and a 4.8% premium to Friday's closing price. This compares to a premium of 16.1% offered by Deutsche Annington for Gagfah's shares.

Two of Conwert's largest shareholders, Haselsteiner Familien-Privatstiftung and Karl Ehlerding and family, have committed to tender a combined stake of 25.6% in Conwert. Other shareholders in the company include Fidelity with a 5% stake and Petrus Advisers, with a 6.7% interest, according to the company website.

The offer, with a minimum acceptance threshold of 50% plus one share, will be published in mid-March and also extend to convertible bonds issued by Conwert, Deutsche Wohnen said.

Cross-border heavyweight
If the deal is successful, Deutsche Wohnen will own some 180,000 units in Germany and Austria. Conwert owns 31,042 units in Germany and Austria and manages another 58,000 units on behalf of third parties. Its 2 million m2 portfolio is valued at €2.83 bn and includes 27,893 of residential and 3,100 of commercial units. Its largest markets outside Austria are Berlin, Leipzig and Potsdam but the company also holds a small portfolio in the Czech Republic, Slovakia and Hungary.

The deal will be financed through free liquidity and a €900 mln bridge facility which Deutsche Wohnen intends to refinance via a capital increase in the course of the year.

The group also said it intends to make a mandatory offer for shares in office property manager ECO Business-Immobilien, in which Conwert owns about 95.8%, adding it would pay €6.35 per share not already owned by Conwert. ECO shares closed at €5.18 apiece on Friday, giving it a market value of about €177 mln.

According to rating agency Moody's, which has confirmed the Baa1 rating for Deutsche Wohnen following the deal, the transaction will 'deepen the company’s core portfolio in Germany as well as provide diversification in attractive, densely polulated regions with rental growth prospects'.