Annington issues formal Gagfah offer, further takeovers mooted
Deutsche Annington kicked off its campaign the week before Christmas to win the hearts and minds of rival Gagfah’s shareholders, who have until 21st January to decide on Annington’s takeover for their company. The company tabled its official offer for Gagfah, which values Gagfah at €3.9bn, or €18.00 per share, a premium of 16% on the share price prevailing at the time of the offer at end-November.
That the takeover will go ahead is not considered to be in much doubt, with Gagfah and Annington’s top management clearly in agreement as to the likely future direction of such a merged residential housing giant. The new company will have 350,000 apartments and a valuation of €21bn, polevaulting it into position as Europe’s second-largest real estate company behind Unibail-Rodamco.
Annington has spoken of synergy effects of at least €84m annually by combining the two huge companies’ resources, after a one time charge of about €310m. These savings can be realised, says Annington, by refinancing Gagfah’s debt on more favourable terms, achieving scale effects in centralised buying and in lowering personnel costs. A report in this week’s Manager Magazin suggests that the bulk of the job losses will come in the Essen-based Gagfah’s head office administration. Gagfah has 1500 employees, while the Bochum-based Annington has 3400.
Bracing itself for its new size, Annington last week issued a €1bn perpetual hybrid bond with a coupon of 4% and a first call date in 2021, which was well over-subscribed. JP Morgan was the sole book runner for the placement. The bond is structured in such a way that it will be treated as 100% equity under IFRS accounting and as 50% equity for 7 years by rating agency S&P. Annington’s CFO Dr. Stefan Kirsten commented, “This successful placement underlines that investors view our planned combination with Gagfah as positively as we do.”
Trade publication Immobilien Zeitung last week reported on a note issued by the analysts at Bankhaus Lampe about future possible mergers among German listed real estate companies. The analysts conclude that Annington’s bid for Gagfah focused on the housing portfolio that “would have been the target or potential merger partner for any of the remaining large German residential housing companies”. In other words, the Nr. 2 in the industry, Deutsche Wohnen AG, “has thus probably missed out on its most ideal takeover target”, suggest the analysts, and at this stage if it attempts a merger with any other smaller candidates in an attempte to keep pace with the Annington-Gagfah monolith, it could actually weaken the company.
The Lampe analysts see a Deutsche Wohnen takeover of LEG Immobilien or TAG Immobilien as being its best bet of gaining further critical mass in its drive for growth. LEG has all of its housing stock of 110,000 units geographically focused in North Rhine-Westphalia, while the Hamburg-based TAG Immobilien has most of its assets in northern and eastern Germany. TAG would be the preferred option, say the analysts, largely because of the geographical spread which would involve only a minimum number of job losses at headquarters through duplication. The downside to such a takeover, however, would be the relatively low density of TAG housing in the big cities, which would endanger the so-called ‘urban profile’ with which Deutsche Wohnen can command a premium for its share price over its NAV – currently at a sizeable 32%. Any dilution of this premium would lower the company’s enterprise value and possibly turn it into a takeover candidate itself.
In fact, Deutsche Wohnen could itself become a target for the new massively-integrated Annington-Gagfah combine, which the analysts now view has having the size, financial resources and nationwide presence to absorb almost any company. A possible further takeover by Annington of LEG Immobilien could make sense, although LEG too is trading at 19% above NAV. Given the current enthusiasm for consolidation in the residential sector, the analysts point out, the average share price premium over NAV is 22%, with only TAG trading at a modest 4% premium. For real value, say the analysts, you have to look at the listed commercial property sector, where the opposite applies, with most companies trading at a discount to NAV and likely offering better value at this point.