Vonovia’s rebuffed hostile bid for rival Deutsche Wohnen has made it a winner already. It has demolished an agreed merger between Wohnen and LEG Immobilien, a third German residential property landlord. Had that deal gone through, Vonovia would have lost the opportunity to gobble up Wohnen’s hot portfolio of Berlin properties.
For now, Vonovia and Wohnen are likely to stay separate though. Vonovia looks too financially stretched to increase its Oct. 14 offer to a level acceptable to Wohnen. Four deals since 2014 have more than doubled the number of flats the Bochum-based group owns and pushed its borrowings uncomfortably high. Integrating four companies within 18 months is also an organisational stretch.
The parsimonious premium of 10 percent and the small cash component offered to Wohnen’s shareholders reflect Vonovia’s financial constraints. Previous real estate deals in Germany saw mark-ups of between 15 and 20 percent. And a 5 percent fall in Vonovia’s shares has devalued its core acquisition currency. The hostile offer currently values Deutsche Wohnen at 25.11 euros per share, a measly 4 percent ahead of the undisturbed 24.05 euros price on Sept. 18.
Deutsche Wohnen shareholders have good arguments to call for more. The company has a well-run and attractive portfolio in Berlin, one of Germany’s fastest-growing property markets. This equity story might lose force in a tie-up with Vonovia, which operates in a lower-quality segment of the property market. Its flats on average are worth 40 percent less. As currently envisaged, Wohnen would contribute 40 percent to the combined company’s net asset value, while its shareholders would only own 34 percent share capital.
Wohnen shareholders might find an offer of around 28.50 euros a share, with a higher cash element, acceptable. Residential letting, meanwhile, is an industry with meaningful economies of scale. Vonovia is a master of crystallising the benefits. Once it has recovered from its recent acquisition spree, it may become Wohnen’s landlord.