Investors lodge protest with BaFin over planned resi mega merger
ADO Properties, the listed, nearly pure-play investor in Berlin residential real estate, has seen its share price practically in free fall over the last eighteen months, having nearly halved over the period. The share price prospects won’t be helped by looming trouble ahead with its plans to create one of Germany’s biggest residential landlords, which is meeting stubborn resistance from bondholders keen to scrap the proposed deal.
As we reported in last month’s REFIRE, the deal is in fact a complex three-way deal in which ADO Properties proposes buying two highly-indebted rivals, listed landlord Adler Real Estate AG which owns low-cost housing across Germany, and Consus Real Estate, a heavily-indebted developer with a high risk profile.
In a contorted maneuver back in December, Adler Real Estate bought ADO Group, the Israeli company that is the majority shareholder in German-listed ADO Properties. This resulted in Adler holding a 33.25% stake in the Germany company ADO Properties. Then, after the installation of new board members, the German ADO Properties proposed a deal to take over Adler, while at the same time saying it would acquire a 22% stake in Consus and has options to acquire a further 51%.
The deal, if successful, would create an €8.6bn residential empire with housing units across Germany. ADO said in December it planned to launch a €500m rights issue after closing the Adler deal.
Since this proposed cross-over deal was announced, the ADO Properties shares have dived a further nearly 20%. The shares of highly-indebted Consus, sporting a loan-to-value ratio of 88%, have jumped by nearly 30% over the same period.
Now, two of ADO’s largest shareholders, Union Investment Privatfonds GmbH and the Canadian asset manager Timbercreek Investment Management have come out in opposition to the proposed three-way merger, claiming it would destroy value, and have formally requested German regulators to block the deal, as reported by Bloomberg.
A number of factors would appear to be conspiring to thwart the deal. According to Reuters, bondholders to ADO Group in Israel, ADO Properties’ erstwhile parent, will demand repayment of about $300m of shekel-denominated debt should the German group plough ahead with the proposed deal. These bondholders believe that the deal is in contravention of the conditions for their debt, and have filed their protest with the Tel Aviv stock exchange. The value of the bonds have fallen more than 12% since the deal was announced, and following a statement by S&P Global Ratings that the deal would create a weakened balance sheet, and with a highly leveraged entity exposed to a downgrade on its credit rating.
According to Michael Muders, a fund manager at Union Investment Privatfonds GmbH, at 5% the largest independent shareholder in ADO Properties, the deal “is not in the interest of ADO shareholders, and it should be canceled. Without consulting the shareholders they have decided to change the risk profile completely…We think this deal should never have happened.”
Timbercreek’s Hamburg-based portfolio manager Claudia Reich Floyd said, "We think there's a big conflict of interest in this deal. ADO Properties did not consult with shareholders other than ADO Group for a transaction that clearly helps Adler's investors. We are now stuck with a highly leveraged company that has a totally different mix of properties." She said that other unnamed shareholders had joined her complaint to the BaFin, Germany’s financial watchdog.
ADO Properties spokespeople were quoted as saying there are “no grounds” to support the ADO Group bondholders demands for repayments, and said the company was in “fruitful dialog with BaFin” and there had been no objections raised by the regulators to the proposed terms of the deal.
On the contrary, said ADO Properties, the deal is a great opportunity, and all shareholders will be able to subscribe to the rights issue. According to Thierry Beaudemoulin, ADO Properties’ CEO in an email statement last week, “By acquiring a developer like Consus the company will be able to develop its own new apartments for letting, and will address the market’s housing shortage. At the same time, it expects to achieve substantial savings by refinancing the majority of Consus’s debt, which is much more expensive than ADO’s.”
As it stands, and with the (so far) approval of the BaFin of ADO’s offer document, Adler shareholders have until March 6th to approve the deal. There may be further twists to this drama yet. (ssk)