Investors Cool on Vonovia Bid to Create German Mega-Landlord

  • Offer `doesn't reflect Deutsche Wohnen's growth potential'
  • Vonovia may have made its move too soon, investors say

Deutsche Wohnen AG Chief Executive Officer Michael Zahn said in March he’d be open to a takeover by a larger competitor. Now there’s an offer on the table from Vonovia SE he doesn’t like it -- and neither do some of the largest shareholders.

Vonovia’s 9.9 billion-euro ($10.6 billion) offer for Deutsche Wohnen once seemed inevitable, as Germany’s rental homeowners get bigger in size and fewer in number. Now the deal’s in doubt because many Deutsche Wohnen investors say the price isn’t high enough, and some Vonovia shareholders are concerned that the company’s growing too quickly.

"We should get a better price for a higher-growth portfolio," said Nicolas Scherf, an investment manager at Henderson Group Plc "The Vonovia offer doesn’t adequately reflect the growth potential in Deutsche Wohnen’s portfolio." Henderson owns shares in both companies, Germany’s biggest residential landlords.

The combined market value of Germany’s publicly traded homeowners has increased tenfold since 2012 as landlords take advantage of favorable financing conditions to buy competitors and privately owned homes. Vonovia, which came close to bankruptcy in 2011, now has 370,000 apartments across Germany and a market valuation of 13 billion euros.

MFS Investment Management, Deutsche Wohnen’s biggest shareholder and also an owner of Vonovia stock, said it’s not comfortable with the “frenetic pace” of M&A in the industry. "We would prefer that each individual management team focus all of its attention on maximizing the value of its existing business," the company wrote in an open letter to Vonovia on Nov. 9.

Investors say the offer has come too soon -- Vonovia is digesting several other acquisitions -- and doesn’t fully reflect Deutsche Wohnen’s strong management and growth prospects in Berlin, where home prices and rents have grown faster than in any other large German city.

Both companies own mostly mass-produced apartments rented to low- and middle-income earners. Deutsche Wohnen also has prewar, landmarked properties and better managed apartments, allowing it to charge higher rent per square meter, said Rogier Quirijns, a portfolio manager at Cohen & Steers, which owns 2 percent of Deutsche Wohnen. In addition, the deal would increase Vonovia’s indebtedness at a time when interest rates are bottoming out, he said.

The bid is Vonovia’s "best and final offer," CEO Rolf Buch said on Nov. 3.

Investor Split

Not everyone’s opposed to the deal. Proxy voting firms Institutional Shareholder Services and Glass, Lewis & Co. recommend that Vonovia investors vote for it at a Nov. 30 shareholder meeting.

Buying Deutsche Wohnen would be a cheap way for Vonovia to gain properties in Germany’s hottest housing market, said Peter Papadakos, an analyst at Green Street Advisors in London.

"It’s not about the synergies," said Papadakos, responding to criticisms by those opposed to the deal that Vonovia won’t be able to achieve savings of about 84 million euros per year that it’s promised. "If you can buy such a high quality portfolio and not overpay for it, then it makes a lot of sense."

Vonovia’s argument that the deal would allow the combined entity to cut costs and take advantage of economies of scale is swaying some investors. Even so, the Nov. 30 vote is too close to call.

Aberdeen Asset Management, which owns shares in both companies, is leaning toward voting for the deal at Vonovia’s shareholder meeting.

"We’d like a better price," said Sanjeet Mangat, a portfolio manager at Aberdeen Asset Management in London. However, the deal makes sense in principle, she said. "Consolidation in this segment is inevitable."

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