Sept. 18 (Bloomberg) -- Minority shareholders in Immoeast AG, the Austrian property developer that plans to merge with majority owner Immofinanz AG, will be offered control of the enlarged company in return for backing the transaction.

“There has to be a compelling commercial argument for the Immoeast shareholders to make sure they raise their hands when they have to vote on the merger,” Eduard Zehetner, chief executive officer of both businesses, said in an interview. “The tricky part is how sweet to make the cake.”

Immofinanz’s biggest asset is its 55 percent stake in Immoeast, whose market value is almost three times bigger. Without that, Immofinanz’s debt exceeds its assets by about 800 million euros ($1.2 billion), Zehetner said Sept. 16 in Amsterdam. That would have to be reflected in the terms of any merger presented to investors, he said.

Zehetner, 58, is selling holdings of Immoeast and Immofinanz, Austria’s largest property companies, after they reported record losses for fiscal 2009. Immofinanz amended its 2008 balance sheet, while Vienna prosecutors are investigating possible accounting fraud by former executives.

Immofinanz will have to buy the rest of Immoeast because any other transaction would be too complicated, Zehetner said. The CEO said he “hopes strongly” that the Vienna-based companies will combine in 2010.

Immoeast and Immofinanz are the best performers on the Vienna exchange this year, climbing more than eightfold and fivefold, respectively. Even so, shares of both are trading at less than a third of their highs reached in 2007. Together, the companies have a market value of about 4.4 billion euros.

Asset Sales

Zehetner replaced Karl Petrikovics as CEO of Immoeast in November and became Immofinanz’s chief in March. He is trying to recoup 350 million euros after Petrikovics arranged for Immoeast to invest 513 million euros in a bond that the supervisory board didn’t know about. Zehetner also plans to sell minority stakes in real-estate funds and closely held property companies.

Zehetner aims to reach two “conditional” agreements relating to the recovery of the 350 million euros before Immoeast shareholders meet on Oct. 1 and Immofinanz investors convene a day later, he said.

One will be with Constantia Packaging BV, a closely held Dutch company, and will result in Immoeast getting 170 million euros in cash, Immoeast shares and other assets including a stake in Austria Metall AG, Zehetner said.

“We could get the money by the end of the year or early next year,” said Zehetner. “That will improve our cash position by as much as 220 million euros.”

Constantia Privatbank

The other agreement Zehetner is seeking is to buy Constantia Privatbank AG, a closely held bank. The bank had to be rescued by five Austrian lenders in October after depositors withdrew money on concern about its involvement in Immofinanz and Immoeast, which it used to manage.

Immoeast and Immofinanz have claims of 400 million euros against Constantia Privatbank, Zehetner said.

Constantia Privatbank, Constantia Packaging and Immofinanz are in talks about a settlement, according to Manfred Waldenmair, a spokesman for the bank.

“There are numerous claims and counterclaims and opinions on the value of the claims differ considerably,” he said. “A takeover of Constantia Privatbank by Immofinanz is a suggestion of Immofinanz. A decision on this won’t be made until the end of the negotiations.”

Alfred Autischer, a spokesman for Constantia Packaging, said he doesn’t expect a settlement by October because several commercial and legal questions remain unresolved.

To contact the reporters on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.

Last Updated: September 17, 2009 18:00 EDT