After six months of failed takeover bids, shareholders need to trust that management teams have learned their lesson.The takeover party is over. Revelers are nursing wounds following a brawl. Stand back from the fray, however, and German housing still looks an unusually healthy asset class.
The shindig started three years ago, when two large portfolios of German homes— LEG Immobilien and Deutsche Annington, subsequently renamed Vonovia —were floated on the Frankfurt stock exchange by their private-equity owners.
A race to consolidate the fragmented sector ensued. A third company, Deutsche Wohnen, bought Berlin specialist GSW, while Vonovia bolstered its position as market leader by paying €3.9 billion ($4.4 billion) for another smaller rival. With share prices soaring, management teams and investors alike were having a fine old time.
The trouble started last September, when Deutsche Wohnen—now the number two player—made a bullish bid for LEG, the number three. LEG was game, but Deutsche Wohnen called off the deal to defend itself against a €14 billion hostile offer from Vonovia.
Deutsche Wohnen rushed through a €1.1 billion acquisition widely seen as an expensive poison pill. Vonovia’s bid fell through when it was supported by just 30% of shareholders in a vote last month.
This frantic activity has brought nothing but bills. Deutsche Wohnen’s full-year accounts included a €47.5 million hit for failed transactions—16% of adjusted funds from operations, its key profit measure.
Both antagonists are acting contrite. Deutsche Wohnen Chief Executive Michael Zahn assured analysts last week that he saw no scope for further consolidation in the listed sector. His counterpart at Vonovia has made similar noises. Deutsche Wohnen now argues that synergies from big deals aren't enough to justify the takeover premiums shareholders expect.
This still leaves unanswered questions. Deutsche Wohnen’s latest pitch to investors bigs up Berlin, where about three-quarters of its assets are located. House prices in the city shot up last year, prompting concerns the market was overheating. Based on his plan to buy LEG, focused on the cooler North-Rhineland-Westphalian market, Mr. Zahn seemed to be siding with Berlin bears. Has he really changed his mind?
Corporate governance remains a worry, too. Deutsche Wohnen’s finance director left during the autumn bidding wars—some say because he didn’t agree with the LEG deal. This, combined with Mr. Zahn’s refusal to consider Vonovia’s offer, has made some wonder whether management has shareholder interests at heart.
These companies might be best avoided were German housing not such an attractive asset class. Rents are growing steadily, but remain among the most affordable, relative to incomes, in the Western world. Berlin is still cheap compared with other German cities, sensationally so versus other European capitals. Easy monetary policy is pushing the sector’s borrowing costs ever lower.
True, share prices trade at a premium to book values. But Green Street Advisors, a real-estate research outfit, still rates German housing top of a league table of 21 publicly traded property markets across Europe and North America for forecast returns relative to local bond yields.
To take advantage, investors just need to trust that management teams have learned their lessons.
Resource: http://www.wsj.com
The shindig started three years ago, when two large portfolios of German homes— LEG Immobilien and Deutsche Annington, subsequently renamed Vonovia —were floated on the Frankfurt stock exchange by their private-equity owners.
A race to consolidate the fragmented sector ensued. A third company, Deutsche Wohnen, bought Berlin specialist GSW, while Vonovia bolstered its position as market leader by paying €3.9 billion ($4.4 billion) for another smaller rival. With share prices soaring, management teams and investors alike were having a fine old time.
The trouble started last September, when Deutsche Wohnen—now the number two player—made a bullish bid for LEG, the number three. LEG was game, but Deutsche Wohnen called off the deal to defend itself against a €14 billion hostile offer from Vonovia.
Deutsche Wohnen rushed through a €1.1 billion acquisition widely seen as an expensive poison pill. Vonovia’s bid fell through when it was supported by just 30% of shareholders in a vote last month.
This frantic activity has brought nothing but bills. Deutsche Wohnen’s full-year accounts included a €47.5 million hit for failed transactions—16% of adjusted funds from operations, its key profit measure.
Both antagonists are acting contrite. Deutsche Wohnen Chief Executive Michael Zahn assured analysts last week that he saw no scope for further consolidation in the listed sector. His counterpart at Vonovia has made similar noises. Deutsche Wohnen now argues that synergies from big deals aren't enough to justify the takeover premiums shareholders expect.
This still leaves unanswered questions. Deutsche Wohnen’s latest pitch to investors bigs up Berlin, where about three-quarters of its assets are located. House prices in the city shot up last year, prompting concerns the market was overheating. Based on his plan to buy LEG, focused on the cooler North-Rhineland-Westphalian market, Mr. Zahn seemed to be siding with Berlin bears. Has he really changed his mind?
Corporate governance remains a worry, too. Deutsche Wohnen’s finance director left during the autumn bidding wars—some say because he didn’t agree with the LEG deal. This, combined with Mr. Zahn’s refusal to consider Vonovia’s offer, has made some wonder whether management has shareholder interests at heart.
These companies might be best avoided were German housing not such an attractive asset class. Rents are growing steadily, but remain among the most affordable, relative to incomes, in the Western world. Berlin is still cheap compared with other German cities, sensationally so versus other European capitals. Easy monetary policy is pushing the sector’s borrowing costs ever lower.
True, share prices trade at a premium to book values. But Green Street Advisors, a real-estate research outfit, still rates German housing top of a league table of 21 publicly traded property markets across Europe and North America for forecast returns relative to local bond yields.
To take advantage, investors just need to trust that management teams have learned their lessons.
Resource: http://www.wsj.com
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