Adler clinches majority acceptances for Westgrund takeover

by

In what now looks like another done deal, the listed Adler Real Estate AG has secured commitments of more than 50% of the votes in Berlin-based WESTGRUND AG in its voluntary public takeover offer. The transaction is now expected to be completed by mid-2015, Adler said in a statement. The combined business will be the fifth-largest listed residential real estate company in Germany by units.

Adler is offering Westgrund shareholders €9 in cash and 0.565 new Adler shares for every three Westgrund shares, reflecting a 20% premium on the average price over the past three months. The new Adler shares will come from a capital increase, and Adler says financing for the transaction has already been secured.

According to Axel Harloff, Adler’s CEO, “The takeover of Westgrund AG offers the opportunity to generate considerable potential for synergies amounting to around. €20 million over the next three years. Westgrund owns an outstanding portfolio which is not adequately reflected in the share price.”

With both Adler and Westgrund having similar business models and strategies, Harloff said they shared the aim of building a considerable property portfolio in Germany targeting B-cities and suburban areas of German metropolitan regions. Adler currently owns and manages more than 31,000 units, while Westgrund owns and manages nearly 21,000 residential units.

The new combined portfolio of 52,000 units, mostly located in Lower Saxony, North Rhine-Westphalia, Berlin, Brandenburg and Saxony, will create the fifth largest listed housing company in Germany. The EPRA net asset value of the combined company will be at around €14.60 per share, and funds from operations will range at €67m-€70m, with a balance sheet at €2.7bn and a market capitalisation of €700m, said Adler.

REFIRE: Adler’s growth has been spectacular since it made a fresh start two years ago, and investors in the stock are looking at a twenty-bagger if they’ve been holding the stock since 2010. The last two years have really seen the company skyrocket, growing from 57 apartment to now owning 31,200 units. The company’s strategy is simple – buying strong yielding residential assets in B-locations with low capex requirements, and then refinancing while interest rates are on the floor. According to Adler’s CEO Harloff, “Lowering vacancies and raising rents is at the very heart of our activities.”

When Adler buys a portfolio, it immediately revalues the assets to reflect current market prices, which has enabled the company to boost the EPRA net asset value last year from €5.27 to about €11.00 per sqm, an aggressive write-up strategy but one which Harloff has publicly said is justified and independently verified by outside valuers. Several disposals have confirmed these revised valuations, he says.

Harloff says the company profits by having the financing in place to move quickly when a portfolio comes on the market, and the seller – for whatever reason – favours avoiding a lengthy bidding process. Even this can lead to squeezing out a further discount on the price, he says. The medium term plan is to grow to 45,000 or 50,000 units, and Adler is preparing for this by increasing a bond issue from €30m to €130m.

REFIRE met recently with the head of Adler subsidiary Estavis, Jacopo Mingazzini, to talk about the company’s speciality, privatization. Estavis, now known as Accentro Real Estate, plays a key role in determining which properties have a future within Adler’s strategy, and which should be sold off. The division has its roots in privatization, and sells assets for its parent and for third parties. Given the sizeable margins frequently available, the division is expected to be an increasing contributor to Adler’s bottom line.

Since trees don’t grow to the sky, and the stock price can’t keep soaring for ever, Adler has been looking around to provide further perspectives to fuel its equity story, hence the merger with Westgrund. Both companies share the same major shareholder in Wecken & Cie, a Swiss family office headed by Klaus Wecken, which also holds a sizeable stake in Swiss Prime Site AG, one of the company’s biggest real estate investors.