Wiesbaden court decision needed in Aareal Bank takeover struggle

Both the management and the supervisory boards of Wiesbaden-based real estate financier Aareal Bank have issue a joint statement recommending that shareholders accept the €1.7bn takeover offer from a financial consortium, bidding as Atlantic BidCo GmbH. The offer, at €29.00 per share, is valid until January 19th.

However, it's still not certain the deal will go through. Petrus Advisers, the bank's largest shareholder controlling a stake of between 15% and 20%, and a vehement opponent of the sale of the bank at that price to the consortium, has appealed to the District Court in Wiesbaden to intervene on the appointment of seats on Aareal's supervisory board.

The consortium, centred around investment groups Advent, Centerbridge and the Canada Pension Plan Investment Board (CPPIB), says it plans to further accelerate Aareal Bank's growth across its three business segments over the coming years.

The S-DAX-listed Aareal Bank's management board has been advised by Perella Weinberg Partners, and its supervisory board by Deutsche Bank. Both advisors have provided 'Fairness Opinions' stating the offer price of €29.00 is indeed a fair price, valuing the company at €1.736 billion.

At an extraordinary general meeting of the bank on December 9th, three supervisory board members were deposed at the request of Petrus Advisers. However, no majority was achieved for the three replacement candidates for the board, through what it now appears was an error made by Morgan Stanley, which led to the votes of hedge fund Teleios for the Petrus candidates being overlooked.

Activist fund Teleios, which supports the position of Petrus Advisers, holds about 5% of Aareal Bank's shares. Petrus believes its three candidates - Heinz Laber, Marion Khüny and Joachim Sonne - would have been voted through had the Teleios votes been properly counted. At the time of writing, it's not absolutely clear how Morgan Stanley, who apart from having a small shareholding in the bidding consortium, managed not to count the Teleios votes, along with a number of other small dissident investors whose votes also failed to be registered on time.

Morgan Stanley has been heavily criticised for what observes call a "huge failure in their duty of care", and have been accused of helping to destabilise Aareal Bank, along with several barbed comments about their potential conflict of interest in the takeover outcome.

Petrus's (and Teleios's) argument is that the offer of €29.00 per share is "far too low" and undervalues the company. They claim that the Aareal managers, under the leadership of recently arrived new CEO Jochen Klösges, have manoevered the bank into a takeover situation that the shareholders do not want, instead of developing a new sustainable strategy. The bank is now being "hastily sold off to private equity investors", they argue.

Among the many questions Petrus is posing to the Aareal management is whether they have been promised potentially lucrative compensation under the takeover terms, how the Morgan Stanley voting oversight came to pass, and whether they made satisfactory efforts to find alternative bidders. Its other long-standing gripe with the bank's management is over the future of the bank's highly-lucrative software and IT subsidiary Aareon, which the rebel shareholders have long believed should be hived off as a separate division. Aareal Bank has always resisted this move.

CEO Klösges has counter-argued that, with additional capital, Aareal would be able to expand new-business underwriting more than previously planned, and the offer was in the best interests of the company, although, as he stressed, "We did not go looking for this discussion - the investors came to us." He added that, "In contrast to current speculation, there will be no break-up of the company", a reference to the media speculation surrounding the value of the bank's software subsidiary Aareon, for which Aareal had originally brought Advent on board as a 30% shareholder last year for about €260m.

In its financing business, Klösges reiterated that the Wiesbaden-based Aareal wants to increase its loan portfolio by about a third to €40bn over the next five years. The bank has suffered through the COVID pandemic because of its exposure to the struggling hotel sector, in addition to its regular lending to offices, retail and logistics - but not to residential, which has proved the most resilient asset class in Germany through the coronavirus slowdown.

A further injection of funding from Advent would help Aareal, along with the cancellation of the dividend, which together could give the bank nearly €1bn to reinvest in its lending portfolio, said Klösges.

Now it's up to the court in Wiesbaden to determine which three candidates get elected to the 12-person supervisory board. Aareal Bank itself has proposed three other candidates, including a banking expert and an IT specialist, and has rejected Petrus's claims that due procedure was not followed in the voting for candidates at the EGM on 9th December.