Deutsche Wohnen Drops LEG Offer, Vows to Fight Off Vonovia

  • LEG deal abandoned as shareholders balk at capital increase
  • Proxy adviser ISS sees Vonovia bid offering `superior value'

Deutsche Wohnen AG, Germany’s second-biggest residential landlord, abandoned a 4.6 billion-euro ($5.2 billion) offer for LEG Immobilien AG to focus on defending itself against a bid from a larger competitor.

Deutsche Wohnen dropped the LEG proposal because it didn’t expect shareholders to approve a capital increase needed for the acquisition, the company said in a statement on Wednesday. It vowed to fight off the almost 10 billion-euro hostile offer from Vonovia SE to combine the two largest players in Germany’s real estate industry.

Vonovia’s bid “doesn’t reflect the company’s intrinsic value and exposes our shareholders to higher risks,” Chief Executive Officer Michael Zahn said on a conference call with analysts on Thursday. Vonovia’s target of generating costs savings of about 84 million euros a year before tax from the combination is unrealistic, he said.

Deutsche Wohnen last month made an all-share bid for LEG that would have expanded its reach beyond Berlin by adding 110,000 apartments in the state of North Rhine-Westphalia. LEG shares have dropped about 6 percent since Vonovia tried to scuttle Deutsche Wohnen’s acquisition, signaling that many investors expected the deal to fail.

Deutsche Wohnen was up 1.9 percent at 24.43 euros at 12:09 p.m. in Frankfurt, giving the company a market value of about 8.2 billion euros. LEG was little changed 0.3 percent at 68.24 euros, while Vonovia was up 0.9 percent at 27.05 euros.

Vonovia may have to raise its bid, currently valued at about 25 euros a share, to win support from most of Deutsche Wohnen’s shareholders, Baader Bank AG analyst Andre Remke wrote in a note to clients on Thursday. Baader said he “could imagine” both deals failing, leaving three stand-alone companies.

Vonovia and Deutsche Wohnen are battling in a market that has been transformed by a slew of acquisitions spurred by low borrowing costs and rising rents. Apartments worth 18.4 billion euros were snapped up in the first nine months of 2015, 81 percent more than a year earlier, according to data compiled by Savills Plc. The total value could rise to 30 billion euros by the end of the year.

‘Superior Value’

Proxy adviser Institutional Shareholder Services on Oct. 15 advised its clients to reject the LEG deal, reversing its earlier position. Vonovia’s offer poses some risks, though it “appears to provide superior value,” ISS said.

Deutsche Wohnen on Wednesday canceled a shareholder meeting scheduled for next week at which investors were due to vote on the capital increase. The company would have needed at least 75 percent approval.

On its conference call, Deutsche Wohnen said rental income from its properties will rise about 3.5 percent this year. The company previously forecast an increase of more than 3 percent.

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