Deutsche Wohnen Slumps After Offering to Buy LEG in Record Deal

  • Residential landlord offers 3.3 of its own shares per LEG one
  • LEG's board accepts offer valuing company at 4.6 billion euros

Deutsche Wohnen AG, Germany’s second-largest residential landlord by market value, dropped the most in almost five years after offering to buy competitor LEG Immobilien AG as it strives to keep up with market leader Vonovia SE.

Deutsche Wohnen shares fell 6.9 percent to 22.4 euros at 10:15 a.m. in Frankfurt, after making the bid yesterday which values LEG at 4.6 billion euros ($5.2 billion) excluding debt. LEG climbed as much as 9.2 percent to 76.72 euros.

The transaction, which would cement Deutsche Wohnen’s ranking with 250,000 rental apartments valued at more than 16 billion euros, is the latest in an intensifying battle for size in the German publicly-traded residential sector. Homeowners’ market valuation has increased about tenfold since 2012 as new companies raised money in stock offerings, bought rivals and accumulated apartments. Deals have been financed with record levels of debt and share sales as companies take advantage of low interest rates and strong demand for real estate from international fund managers.

“It looks to me like a defensive move against potentially being taken out by Vonovia, rather than a move that makes a lot of financial sense in its own right,” said Peter Papadakos, an analyst at Green Street Advisors in London. “The 13 percent premium strikes me as a rather full price.”

Intensifying Battle

The deal would be the nation’s biggest property transaction, with Deutsche Wohnen offering 3.3 of its own shares for each LEG share, a price that’s about 13 percent above LEG’s Friday close. Deutsche Wohnen Chief Executive Officer Michael Zahn would run the combined company and LEG’s supervisory board has accepted the offer.

Vonovia, which has more than tripled its market value following a two-year acquisition spree, owns 370,000 homes worth about 21 billion euros. The Bochum-based company previously held the record for the biggest German property transaction, with its purchase earlier this year of Gagfah SA valued at 3.9 billion euros excluding debt.

Vonovia Counteroffer

Vonovia is in the early stages of considering a counteroffer, one person
familiar with the matter said. No decision has been made, the person said.
A representative for the company declined to comment.

“There aren’t a lot of large portfolios left in the non-listed sector, so that accelerates consolidation in the listed sector,” said Peter Barkow, managing director at Barkow Consulting in Dusseldorf.

Buying LEG would expand Deutsche Wohnen’s geographic reach and add apartments in less affluent areas. Most of Deutsche Wohnen’s 144,000 apartments are in Berlin, where prices have soared as the population grows, and around the wealthy cities of Frankfurt and Cologne. Deutsche Wohnen’s portfolio includes pre-war homes with architectural flourishes, such as an estate in Berlin that’s a UNESCO World Heritage Site.

Industrial Towns

By contrast, all of LEG’s 110,000 apartments are in the state of North Rhine-Westphalia, which has Germany’s biggest economy but also many formerly industrial towns with high vacancy and unemployment rates. Its homes are more often mass-produced, prefabricated apartment blocks built in a hurry after World War II.

“The quality of the LEG portfolio is at least one notch below Deutsche Wohnen’s,” said Papadakos. “That said, there’s probably more value to be had there than buying in Berlin,” where prices have been rising more quickly.

LEG charges an average monthly rent of 5.16 euros per square meter (11 square feet) at the end of June, compared with 5.78 euros at Deutsche Wohnen, according to company statements.

If the deal succeeds, former Deutsche Wohnen shareholders would hold about 61 percent of shares in the combined company, and former LEG shareholders would hold around 39 percent.

Deutsche Wohnen was advised by Deutsche Bank AG and Victoria Partners, while LEG was advised by Goldman Sachs Group Inc. The goal is to complete the transaction by the end of December, Deutsche Wohnen said in its statement.

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