Deutsche Wohnen has launched its long-expected all-share takeover bid for rival GSW Immobilien which values GSW’s equity at €1.75bn and would create Germany’s second-largest residential landlord by portfolio value.
This morning, GSW shareholders have been offered 51 shares in Deutsche Wohnen for every 20 of their current shares, equating to a 43% stake in the combined company with current Deutsche Wohnen shareholders retaining the 57% balance.
On which basis, Deutsche Wohnen’s valuation of GSW’s equity, at €1.75bn, reflects a 15.4% premium on the weighted average GSW share price over the last three months.
Deutsche Wohnen has proposed a capital increase, which requires shareholder approval at an EGM on 30 September, to create new shares for the exchange and a minimum acceptance threshold of 75%.
If passed, the transaction is expected to close in the first half of 2014.
However, in a just-published research note, JP Morgan wrote: “Our detailed analysis shows that today’s announced proposed takeover of GSW by Deutsche Wohnen is far from being a done deal for two reasons: 1) It would be difficult for Deutsche Wohnen to increase its offer; 2) If GSW accelerates cost savings (which it is doing) our fair value per share would increase to €36, which is above today’s implied offer of €33.6 (2pm today).
“We believe today’s offer undervalues GSW’s prospects in particular because of its Berlin focus, cost savings programme and anticipated strong rental growth. We continue to be overweight GSW.”
The combined German residential property company would leapfrog Gagfah as the second-largest domestic landlord, with a portfolio of 147,429 residential units valued at €8.48bn as at June 30, second only Deutsche Annington.
Deutsche Wohnen’s portfolio comprises 89,441 residential units valued at €5.15bn, while GSW’s portfolio comprises 57,988 residential units valued at €1.79bn.
By comparison, Deutsche Annington owns around 179,000 residential units valued at €10.4bn, while Gagfah owns 144,046 residential units valued at €7.7bn, both as at June 30.
The takeover would create an “enlarged Deutsche Wohnen”, the company said in presentation accompanying the takeover offer this morning, with 72% of its total portfolio located in Berlin and Greater Berlin.
Michael Zahn, chief executive officer of Deutsche Wohnen AG, said in a statement: “With the combination of Deutsche Wohnen and GSW, the two companies combine their strengths and create a leading company by European standards.
“All of our stakeholders will benefit from this merger: We will create significant added value based on the large potential of the Berlin market and the expected synergy effects. At the same time we secure investments into our housing stock and reinforce our quality leadership in this sector.”
In May last year, Deutsche Wohnen acquired the 23,500-strong BauBeCon portfolio for €1.235bn after it was sold by Barclays Capital, which enforced over the defaulted loan in November 2011.
Subsequently, Deutsche Wohnen bought 6,900 Berlin multi-family units from Blackstone in April this year, part of Level One’s former assets bought out of administration more than two years ago, for €260m in cash and 8.15m shares worth €109m.
John van Marle, real estate analyst at JP Morgan Cazenove, wrote this morning: “Deutsche Wohnen is the natural bidder for this and GSW has showed in their latest results that their margins have improved through increase in size. The combined company will be liquid and of great quality. So it certainly all makes sense.
“The question then becomes: will there be counter bidders? That will be interesting to look at. LEG has made such a big deal of being positive about NRW that Berlin doesn’t feel like a natural fit. I suppose the dark horse could be Gagfah, but only because the ex-GSW CEO has moved there. The obvious difficulty is that Gagfah trades at a 27% discount to 2013 NAV and has a 60%-plus LTV.”
Deutsche Wohnen added in a statement this morning that the two companies “share a common focus on value conservation regarding their housing stock.
“Both companies have been and are investing adequately thus ensuring a high standard for their tenants. The efforts will be further intensified in the upcoming years.
“As a result of the combination with GSW, Deutsche Wohnen will achieve the critical size allowing the company to further establish itself in the European capital market and increase its already high attractiveness for the capital markets.
Once integrated, which is forecast to take around 24 months, Deutsche Wohnen estimates that the combination will generate cost efficiencies of approximately €25m per annum, resulting from increased economies of scale in the management and administration of properties as well as facility management, insurance and energy costs savings.
Lars Wittan, chief financial officer of Deutsche Wohnen, said in a statement: “After full integration, we expect sustainable FFO accretion per share of Deutsche Wohnen AG in the mid-single-digit percent range implying a sustainable increase in profits. The combination with GSW Immobilien AG further strengthens the already high attractiveness of the company for the capital markets.”
Both companies are long-term financed with combined LTV of 55%.
Deutsche Bank and UBS are advising Deutsche Wohnen.