Deutsche Annington finalises €21b tie-up with Gagfah

Deutsche Annington, Germany's largest listed residential landlord, is pressing ahead with its takeover of peer Gagfah after successfully closing a tender offer for all its shares this week.

Shareholders representing 94% of Gagfah’s capital have accepted the bid, effectively clearing the way for a closing of the merger in the first quarter of 2015.

The €3.9 bn shares and cash offer, which has already been cleared by the German antitrust authority, is set to create the largest listed residential landlord in Europe with a portfolio of some 350,000 flats worth around €21 bn. It will also create the continent's second-largest quoted real estate company after France's Unibail-Rodamco, putting it on a par with the new Klépierre-Corio combine.

‘Our acquisition of Gagfah combines the best of both worlds,’ CEO Rolf Buch of Deutsche Annington and the incoming CEO of the new group, told PropertyEU. ‘It will make us the biggest residential landlord in Europe. The attraction of Gagfah is that it has a similar culture to ours. Even our headquarters are close by! In addition, we are the only two national residential companies, so the synergies are greater than they would be if we were combining any two regional players.’

Deutsche Annington rocked the German stock market in November last year when it announced plans to launch a voluntary takeover bid for all the outstanding shares of Gagfah. It offered to pay 5 Deutsche Annington shares and €122.52 in cash for 14 Gagfah shares.

Major investors in Deutsche Annington include the Abu Dhabi Investment Authority (12%); Norges Bank (8%) and BlackRock (7%).

Interestingly the offer – which was subject to a minimum acceptance threshold of 50% - was not rejected by Gagfah’s board, as has been the case for virtually all significant M&A activity in the industry, such as the Deutsche Wohnen/GSW Immobilien or TAG Immobilien /Colonia Real Estate deals in recent years.

Another striking difference with past residential mergers is that the combination of the two businesses will not result in a more-focused portfolio, such as was the case with the recent merger of Deutsche Wohnen with the pure-Berlin-play GSW Immobilien.

‘The combined portfolio will have a wide regional diversification,’ noted Kai Klose, an analyst with Berenberg Bank in London. ‘Its portfolio will better represent the German landscape on a regional basis, even if the exposure to Bavaria and Baden-Württemberg– the two economically strongest federal states – remains small.’

CONSOLIDATION TO SHAKE UP THE INDUSTRY
Deutsche Annington had already been very active on the acquisitions front in 2014. In February last year, it acquired Vitus Immobilien and homes owned by DeWAG in separate deals for around €2.4 bn, boosting its residential portfolio at the time by 24%. Together, the residential companies have more than 40,000 units.

‘We will consider further acquisitions,’ Buch said. ‘However, we don’t have a fixed annual target because we think that could be dangerous, because then a listed company would have to deliver – and may overprice a target,’ Buch said, ‘We don’t have a minimum or maximum target size, with the only exception that the other company shouldn’t be bigger than us,’ Buch added.

There is a trend towards consolidation in the German residential market because of the cost benefits, according to Buch. However, listed players account for just 3% of Germany’s 40 million apartments. ‘Residential is popular because it’s stable and more resistant to economic cycles than other real estate asset classes,’ he said.

According to Konstantin Kortmann, national director and team leader of residential investment at JLL in Germany, the Deutsche Annington/Gagfah merger is ‘a very significant deal for the market’. ‘It’s the largest deal of its kind for many years. Essentially, Germany’s Number 1 is taking over its Number 3. It will create a nationwide platform,’ he said.

There has been a substantial amount of activity elsewhere in the sector this year. Listed real estate firm Adler Real Estate bought a majority stake in housing association Jade in Wilhelmshaven, northern Germany (6,750 units) in October for around €200 mln. Listed housing firm Westgrund acquired the Phoenix portfolio comprising 13,300 units from Berlinovo, which is majority-owned by the state of Berlin, for €390 mln in July.

Now, further consolidation is looking like a given, said Kortmann. ‘Companies such as Gagfah 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. Subsequently, we’re likely to see further consolidation in the sector going forward.’

Analysts are having a field day trying to predict the next merger. One possibility is that Berlin-based Deutsche Wohnen will merge with Hamburg-based real estate investor and manager TAG Immobilien. ‘TAG has been perceived to be dressing itself up as a bride – or potential takeover partner - but there haven’t been any takers yet,’ said one analyst who asked not to be identified. Westgrund and Adler Real Estate could also merge, either with each other or other parties.

The rationale for economies of scale and cost savings in the residential sector is the comparatively high leakage of roughly a third between the net income and net operating income, according to Kortmann. ‘This is a higher share than in the commercial real estate sector, where it is 15% to 20%. Cost benefits are the main drivers behind these mergers, as are economies of scale. There’s a multiple game at play – real estate returns and stock dividends, too.’