Still obstacles in the way of CA Immo/ Immofinanz merger

A year after the last, acrimonious, and ultimately unsuccessful attempt to merge their two companies, the two Austrian listed heavyweights CA Immo and Immofinanz have now agreed in principle to work towards a merger. If all goes according to plan, the two managements said they believed the merger could be consummated by 2017. There are still plenty of obstacles in the way of the merger, both parties concede.

The Russian owned O1 Group, which is pivotal to the potential merger, has now gained nine out of twelve seats on CA Immo's supervisory board following CA Immo's annual shareholder meeting last week. The Russian group, controlled by billionaire Boris Mints and its Cyprus-based subsidiary Terim Ltd, which owns 26% of CA Immo, has already agreed to sell it stake to Immofinanz.

After having secured four seats on CA Immo's board for its candidates, O1 made use of three golden shares to choose three new board members in addition to winning investor support for two more of its candidates.

CA Immo's new CEO Frank Nickel, who took over from long-term boss Bruno Ettenauer earlier this year, said 2017 was the right timing for the merger between the two companies, to make sure the final share exchange ratio would be right for CA Immo shareholders. Both companies would then vote on the respective valuations next year, and will need to gain 75% approval from their shareholders to conclude the merger.

Between now and then, however, Nickel said that he and CFO Florian Nowotny see plenty of potential hurdles to overcome – not least that Immofinanz has said that all is dependent on Immofinanz selling off it Russian retail interests, consisting of five shopping malls with a net asset value of about €500m (versus a book value of €1.2bn). These have been hurt by Russia's weak economy and the collapsing ruble, leading to Immofinanz taking a €400m writedown on the business in February.

O1 Group's agreement with Immofinanz sees it selling its 26% in CA Immo for €604 million, or 23.50 euros a share to Immofinanz, who plan to finance half the investment with a convertible bond, put up €200m in cash, and finance the rest with a bridge loan. It might also consider raise funds by selling shares in its former residential unit BUWOG AG, in which it still holds a 29% stake, valued at €540m.

CA Immo's shares spiked briefly above €20.00 before finishing the week at 16.60 euros a share valuing the company at €1.6 billion. Immofinanz 's market capitalisation is about €2 billion, but trades at a deeper discount to its net asset value, at around 50%, than CA Immo, which is viewed as having a more robust cash-flow profile.

A merger between the two companies would create an entity comprising around 75%of its portfolio in office space and 21% retail, with a total space of 3.2 million sqm and assets under management of about €6bn, with a project development pipeline of a further €2bn. According to Immofinanz CEO Oliver Schumy, the proposed merger would create "substantial synergies" and lead to annual cost savings of about €33m.