HOT PROPERTY Vonovia Plays for Time

German property companies are caught up in frenzy of mergers and takeovers, culminating in Vonovia’s €14-billion hostile bid for rival Deutsche Wohnen. But shareholders aren't biting, forcing Vonovia to extend its tender deadline.
Vonovia will take some time to add to its real-estate empire.

A million refugees are now in Germany and more are on their way: Who will build the new housing the country so badly needs? One thing seems certain: It will not be the large, publicly traded property companies.

Instead of launching new building projects, Vonovia and the other large players in Germany's real-estate sector are focusing all their energies on takeover battles. The struggles in the property business will culminate in two weeks’ time, when Vonovia’s tender offer for its largest rival, Deutsche Wohnen (DW) expires.

The deadline for the tender offer was to have come at midnight on Tuesday, until a last-minute extension was granted by Vonovia Chief Executive Rolf Buch, who even lowered the acceptance-level threshold from 57 percent to 50 percent.

"We don't need the security buffer any more," Mr. Buch told Handelsblatt, insisting the lower threshold was not a sign of panic but simply "increases the chances" of success.

With the extension, we’ll know in two weeks whether Vonovia – formerly known as Deutsche Annington and already the largest real-estate player in Germany – will merge with Deutsche Wohnen to create a new giant company controlling half a million properties in Germany. It would mark the largest-ever takeover in the country's property market.

Welcome to the bizarre world of the Big Property, German style. A world ruled by dealmakers and vested interests, not by master builders. Where property trading, not house building, adds shareholder value. Where top managers think about units rented out, not units built. Where companies wrestle each other for control of valuable properties. Where size is everything. Where managers, eager to beat their rivals, dance around the bonfire of the vanities.

Welcome to the bizarre world of the Big Property, German style. A world ruled by dealmakers and vested interests, not by master builders.

It is all happening in an environment where the real-estate business is booming. Germany, unlike many of its neighbors, didn't suffer a housing crisis in 2008. But with interest rates falling to record lows, many Germans once reluctant to buy property have begun to see an investment opportunity. Property prices have been surging in big cities like Berlin, Munich, Hamburg and Frankfurt.

One sign of the booming real-estate sector: Vonovia last year became the first real-estate firm to join Germany's blue-chip DAX index of the largest 30 companies. Now it's hoping to expand its lead over rivals, though whether DW's shareholders take the bait remains uncertain.

“It is going to be tight, because the Vonovia offer is not all that sexy: DW shareholders aren’t jumping at it,” said lawyer Oliver Beyer, transactions expert at the law firm Simmons & Simmons. Vonovia is offering seven of its own shares for each DW share, as well as €83.14 in cash. To gain control of its rival, it needs 50 percent plus one share.

Mr. Buch blamed the slow uptake in part on a market environment that has become "more difficult," with many investors staying away amid the steep declines in Germany's blue-chip DAX stock index since the start of this year. Given the market uncertainty, he predicted many DW shareholders would only make the move to Vonovia "on the last day, or even in the last hours" before the deadline.

This latest no-holds-barred takeover battle is unusual for the German property sector: Until now, the takeover mania in the past few years has been reasonably friendly. This is above all because, unlike in other sectors, the handful of publicly listed property companies are not direct competitors. Since their property holdings are often widely geographically separated, they rarely compete directly for customers, unlike producers of consumer or investment goods.

On top of that, top property managers know each other’s businesses inside out and upside down. Mr. Buch, the head of Vonovia, and Michael Zahn, Deutsche Wohnen boss, have crossed paths on numerous deals. They have examined the same balance sheets and pursued the same targets. When something big has come on the market, they’ve all met with the seller, albeit rarely at the same meeting.

More than once, one firm has nabbed a portfolio out of the grasp of another key player. In 2008, Vonovia lost out to Whitehall in a battle to buy LEG, holder of a newly privatized portfolio of properties in North Rhine-Westphalia, Germany’s largest state. In 2012, another large property company, Patrizia, beat out Vonovia to buy the company now known as Südewo. Mr. Zahn, the DW boss, pulled out of that race, saying the deal had gotten too pricey. Later, Vonovia went on to buy the Südewo portfolio from Patrizia at an even higher price.


Climbing to the Top Via Takeovers-01


Vonovia’s hostile bid for DW is not the first time a mega-deal has been mooted in the sector. Mr. Buch and Mr. Zahn are thought to have mulled over a possible merger last year. The talks have never been officially denied.

“At least from a capital market point of view, a merger of Annington [now known as Vonovia] and Deutsche Wohnen could make a lot of sense. On an international scale, German property companies are still too small,” said Mr. Zahn in a June 2015 interview with Handelsblatt. Not the kind of statement he would make by accident.

But how did this size-is-everything merger mania come about? Flashback to the beginning of the millennium, to the fundamental misunderstanding which set the whole take-over machinery in motion.

Around the year 2000, British and American private equity companies began to take notice of the comparatively low level of home ownership in Germany. They thought they could buy up apartments cheaply on a large scale, and then sell them on at a premium to renters and investors. Portfolio sellers were easy to find: local governments were short of cash, and companies were eager to get rid of non-core-assets like company housing. Low interest rates – at least, they seemed low back then – meant returns could be highly leveraged with debt.

But the numbers didn’t add up. Tenants did not want to go into debt to buy their apartments. The companies involved wanted to make a quick buck and get out again, but it didn’t work. Some property-ownership companies were left with enormous holdings, with repayment dates looming. These crisis companies included Terra Firma, a forerunner company of Deutsche Annington and Vonovia, as well as Gagfah, another real-estate colossus which Vonovia bought up just months ago.


Germany's Largest Real-Estate IPOs-01


These debts almost brought Deutsche Annington and Gagfah to their knees in 2011. Both close to bankruptcy, they were saved by the stock market recovery and the fall in interest rates. This gave financial investors the chance to cash out. Once their debts had been paid off, the road to flotation was clear. This paved the way for the expansion of Vonovia and Deutsche Wohnen, who in recent years have expanded by gobbling up numerous smaller companies.

If previously the German property business focused on taking over portfolios of privatized apartments, these days what counts is economies of scale, power over suppliers and muscle on the capital markets.

Mr. Buch, the head of Vonovia, has aggressively pursued these strategies, for example buying windows direct from Romanian manufacturers to cut out German middlemen. To place billions of bonds on the markets you have to be a seriously big player, like Unibail Rodamco, Europe’s biggest real estate company. And now Vonovia too.

This is why Mr. Buch is making very sure the takeover will not endanger Vonovia’s “BBB+” credit rating.

“Rolf Buch runs Vonovia because he is a capital market expert, not because he’s a property expert,” said Mr. Beyer, the Simmons & Simmons transaction expert. Mr. Buch, who took over at Vonovia in 2013, previously spent years with media giant Bertelsmann. By contrast, Mr. Zahn, his Deutsche Wohnen opposite, is a property man through and through. Insiders say he is intimately familiar with every detail of the business.

It is going to be tight, because the Vonovia offer is not all that sexy: DW shareholders aren’t jumping at it. Oliver Beyer, Transactions expert, Simmons & Simmons

As decision day draws near, relations are getting tense between Vonovia and Deutsche Wohnen. But although the two top executives insist on their differences, they are careful to keep things polite in public.

“I have the greatest respect for Mr. Zahn’s achievements,” said Mr. Buch at Vonovia’s extraordinary shareholder at the end of November, held to approve of raising the capital for the takeover.

Experienced figures in the sector say public expressions of respect reflect a genuine relationship going back many years. “In personal terms, Zahn and Buch are closer to each other than Buch is to his CFO,” said one insider. He may have been referring to the men’s shared interest in fast cars.

But on one point, they vehemently disagree. Mr. Zahn has little time for industry bodies. Ironic then, that his company still shares premises with the GdW, the central body of German housing associations. Mr. Buch, by contrast, is close to the group, and so is a regular visitor to the building.

The German tenants’ federation sees the planned takeover with mixed feelings, not least since it would give Vonovia greater weight in those associations, which often go head to head with tenants’ representatives. “Mr. Buch is clearly an industry association guy,” said Ulrich Ropertz, head of the tenants’ body.

Capital markets have quite different worries: Above all, they worry that Vonovia will have bitten off more than it can chew by taking over DW so soon after Gagfah. It could take six to nine months to integrate computer systems and restructure personnel and systems, said Bernd Janssen, head of equities research at VictoriaPartners.

“Past experience shows it can take 12 to 18 months to have everyone in a merged company working as efficiently as before,” he added.

Vonovia manager Klaus Freiberg strongly contests that assessment. “The integration of Gagfah is done,” he said. If the takeover of DW is approved, integration will be simpler, since its portfolio is concentrated in the Berlin area, he said.

If the mega-takeover succeeds, for a change we might even see Vonovia flex its muscles as a builder, rather than a real-estate dealer. If the bid succeeds, the company will build 10,000 new homes in Berlin, Mr. Freiberg announced recently.



Reiner Reichel has been working for Handelsblatt since 1995 and specializes in real estate, closed-end fund and system models. To contact the author: [email protected].