Consolidation in listed sector to continue, conwert still in play

Speaking at the annual Handelsblatt Immobilientagung in Hamburg last week, Andreas Segal, board member and finance director at listed Deutsche Wohnen AG, addressed the issue of consolidation among German listed property groups. In particular, he was very open and frank about the reasons why his company’s bid for listed Austrian residential investor conwert Immobilien was allowed to lapse.

Deutsche Wohnen had offered €11.50 per share of conwert which had seen the conwert stock price leap sharply from about €9.00 at the start of the year. The bid valued the Vienna-listed conwert at nearly €1.2bn. By mid-April the share tender offer had expired; conwert's management announced that the majority of its shareholders had not accepted the offer, and that “the shareholder structure therefore remains unchanged at present.”

Conwert owns €1.8bn of residential property and about €1bn of commercial property in Germany and Austria, with the residential component about 50:50 split between Germany and Austria.

Deutsche Wohnen, Germany's second-largest listed residential firm with 147,000 units, conceded defeat on its bid. “Given that the minimum acceptance threshold regarding the takeover offer for conwert shares has not been reached, the offers for conwert's convertible bonds as well as the anticipatory mandatory offer for the relevant shares of (unit) ECO Business-Immobilien AG are no longer effective,” the company said in a statement.

Segal offered an interesting perspective on why the deal lapsed. He said that 80% of the conwert shareholders would have sold their shares at the offer price of €11.50, but that funds and other institutions stepped in to take their shares off them in the expectation that Deutsche Wohnen would come back at them with a revised higher bid. (The share price rose to nearly €12.50 as speculation about a white knight arriving to further top the bid circulated in the markets).

He had made it clear that Deutsche Wohnen would not be increasing its offer, and would rather see the offer fail than to over-bid for the Austrian company. Conwert was simply not a “strategic asset” that should be bought at any price, he said.

Segal said that the fact that the share price of conwert has not fallen back to the pre-bid price (it is now trading at just under €11.50) further strengthens his view that new conwert shareholders believe that a new bid will come from another quarter.

The conwert camp had been split with two of the company’s largest shareholders - Haselsteiner Familien-Privatstiftung and Hamburg-based Karl Ehlerding and family - committing to tender a combined stake of 25.6% in conwert, had the tender offer for at least 50%, plus one share succeeded. However, conwert’s management board had been urging investors to reject Deutsche Wohnen’s bid as not valuing the company adequately.

“With regard to the offer price, the administrative board has reached the conclusion that the stand-alone value of the business per conwert share, i.e. the value of the business without taking into account any synergies, is already above the offer price offered by the bidder,” conwert said in a statement.

Conwert shareholders may be comforted by large minority shareholder Karl Ehlerding (with 6.6% of the company), who said he would launch his own takeover bid for 40% of the conwert shares at €10.25 per share. He could count on the support of Hans Peter Haselsteiner, the largest shareholder with 24.1%, who supported the Deutsche Wohnen bid. Against the bid were Petrus Advisers with 6.7% and Alexander Proschofsky, with a holding of 1.5% through his vehicle Cube Invest.

One direct consequence of the failed takeover bid is that conwert CEO Clemens Schneider will lose his job. Austrian newspaper “Kurier” was the first source to claim that his head was rolling, followed by an ad-hoc board statement from conwert that he would be leaving due to “different views on implementing the company’s strategy”. Major shareholder Haselsteiner had brought him into the company a year ago, and was in favour of accepting the takeover offer, but Schneider and his top management team publicly disagreed.

Segal offered his views on further consolidation in the listed residential sector, as existing players face up to the emergence of the giant new combination of Deutsche Annington and erstwhile rival Gagfah, which will own and manage 350,000 apartment units. Deutsche Wohnen with its 150,000 units would have added a further 27,350 units from conwert. Despite missing out this time on conwert, Segal sees further scope for consolidation within the sector, “given that there are 41m apartments in Germany, and the listed sector barely features on the radar screen yet.”

He acknowledged the need for further growth, from Deutsche Wohnen’s current €7.2bn to “the next hurdle of €10bn, as that’s when you start to be noticed by the big global funds”, but says he sees no realistic takeover target in sight, given the economies of scale that Deutsche Wohnen profits from by having many of its holdings clustered in the geographical regions of Berlin (70%), Dresden, Leipzig, Rhine-Main (around Frankfurt) and cities such as Braunschweig.

The need for any merger or takeover candidate to have a similar business model is critical in trying to scale up to reach size, he said. Having a clear, undilluted business strategy with a simple message for investors has been critical in the recent attraction of the listed German property companies for international investors, he said.

Although Segal did not mention it, one company that has been suggested several times in interviews with Michael Zahn, the CEO of Deutsche Wohnen, is the Düsseldorf-based LEG Immobilien, another company basking in investor favour for much the same reasons. As Segal said, it will be very interesting to see what happens over the next 24 months.

As for conwert, the management board issued a statement after the elapse of the Deutsche Wohnnen offer, saying: “Management sees the rejection of the offer as a mandate from shareholders to continue to improve profitability and, as announced, to review the financing structure in order to start a significant reduction in interest costs.”

The board then added: “Management anticipates a further consolidation in the property sector in Germany and Austria. The administrative board and executive directors will strive to achieve the best-possible results for shareholders in the course of this consolidation process”. This sounds very much like an invitation for others to view them as a takeover candidate, but only by being prepared to offer a bit more juice than their last suitor. We’ll be returning to this story shortly, we suspect.