Aareal surprises to the upside with lucrative sale of Aareon stake

Wiesbaden-based real estate financier Aareal Bank has sold a 30% stake in its IT subsidiary Aareon for about €260m to financial investor Advent, after a lengthy process to develop a strategy for the subsidiary and talk with several potential suitors.

In a statement, the bank said the partial sale will increase Aareal Bank’s scope to exploit value-creating opportunities in line with its current strategy, while providing additional flexibility in capital management. It said it is convinced it can increase Aareon’s value more significantly in conjunction with Advent than on its own.

The software provided by Aareon helps professional landlords manage their properties and rental income streams, and permits customers to lodge rental income with Aareal, which helps Aareal in refinancing itself.

The extra profit from the sale, which was for higher than analysts had expected, is estimated by the bank at €180m and will be welcomed as the bank’s core business, structured property finance, has been struggling with low interest rates and the corona crisis. 

Shareholders immediately bid up the bank’s stock price, given the new imputed valuation for the Aareon subsidiary of €960, more than twice what it was estimated at before the corona crisis. At that price, the Aareon subsidiary makes up the bulk of the bank’s own market cap, which is about €1.2bn. This will certainly add fuel to the arguments of Aareal Bank’s activist investors such as hedge fund Teleios with a 9% shareholding (REFIRE has been reporting regularly on this story for the last year) who were urging the bank to capitalize on its undervalued gem, in the face of opposition from bank CEO Hermann Josef Merkens.

M&A activity, with which the bank had been able to pump up its profits several times in recent years, such as the spate of takeovers of Corealcredit, Westimmo and Düsseldorfer Hypothekenbank at very competitive prices, has been very quiet for some time. Those deals, each with a certain ‘bad will’ component, resulted in the bank booking a special profit each time.

In the first half of this year, Aareal Bank only just managed to escape going into the red in the face of significantly higher bad debt provisions. Through its financing of hotels, shopping centres or office buildings, the share price has taken a battering due to the corona measures and the potential impact on traditional Aareal clients.

Merkens said in a statement that any further increase in Advent’s stake in Aareon “was neither envisaged in the contract nor in our discussions”. Teleios co-founder said he was ‘delighted’ that the bank had finally acted “in the interest of its shareholders”, and that the deal was a “wonderful result for Aareon and all Aareal Bank shareholders.”

Aareon had a turnover in 2019 of €252m and EBITDA of €61m, and this margin is targeted to increase to 40% by 2025. Should this be realized, Merkens said that the Aareon subsidiary would then be “a desirable IPO candidate”, without committing to a listing as the exit strategy. 

Critical to Aareon’s growth plans would be the collaboration with equity investor Advent, who will be offering some of their own nominees to the IT subsidiary’s supervisory board.

"Advent has broad expertise and a deep network in the technology sector," said Merkens, adding that Advent has a "good record" in the sustainable further development of its investments. He also stressed the "immense M&A expertise" and the "considerable financial strength" that Advent provides.

Merkens said both Aareal Bank and Advent are prepared to provide Aareon with additional equity capital if required. In addition, the IT company may also take on further debt, as it currently has a very low debt burden. Advent could also provide lending to Aareon if necessary, he said. In any event, Aareon would be pursuing "small and medium-sized acquisitions", which Advent intends to use to improve its product range and geographical presence.

Separately, Aareal continued its long-term strategy of shedding its non-performing loans to reduce its overall risk exposure, and during July it sold around €140m of loans and advances in the Italian market, reducing its Italian NPL volume to less than €500m, half the level it had in 2019. The bank said it had now brought its total NPL volume down to less than €1bn, bringing its overall NPL ratio down to below 4%.

CEO Merkens said in a statement: : “In a time of great uncertainty on the property and capital markets, we once again managed to significantly reduce our Italian credit risk exposure, at reasonable expense.

“In the remaining course of the year, we want to continue reducing risk exposures in this manner, provided that opportunities arise which are economically viable. The successful de-risking is one of the factors that allows us to weather the current crisis.”