Vonovia Upends German Apartment Market With $23 Billion Deal

Germany’s apartment market is being upended after Vonovia SE agreed to acquire rival Deutsche Wohnen SE for about 19 billion euros ($23 billion) in a deal that risks further stoking tensions over affordable housing.

The year’s biggest takeover in Europe and the biggest-ever in the region’s real estate sector would combine the country’s two largest residential landlords into an entity that controls more than 500,000 apartments. The transaction would further consolidate the power of large property owners, an issue that has inflamed activists especially in Berlin.

Vonovia Upends German Apartment Market With $23 Billion Deal

German landlords have faced intense public pressure over the past few years over rising prices, particularly in the nation’s capital. Deutsche Wohnen has been the main target of activists after buying a large amount of social housing that was put up for sale by the city to pay down public debt after the Berlin Wall fell.

The latest demonstration was held just last weekend, and the issue is set to remain on the agenda ahead of national elections in September.

The deal includes concessions to the city and tenants in an effort at a “new beginning,” Vonovia Chief Executive Officer Rolf Buch said after talks with Berlin Mayor Michael Mueller.

The company plans to offer to sell about 20,000 apartments to the Berlin government, build some 13,000 new units and limit rent increases. Mueller welcomed the plan.

“I want the city administration to have more influence over the housing market, and the deal helps us in that respect,” he said.

It remains to be seen whether that will be enough to satisfy other critics, especially activists seeking a referendum to force the city to buy out large landlords.

What Our Analysts Say:

“The tense Berlin rent situation complicates the outlook, which may not be resolved by the planned concessions toward tenants in the city”

-- Iwona Hovenko and Susan Munden, Bloomberg Intelligence (click here for the full note)

Finding a home in Germany’s trendy capital has gotten steadily more difficult over the past two decades as new residents, investors and companies have moved in. Rental prices in many neighborhoods have more than doubled since 2009 as construction has lagged demand.

Berlin was unimaginably cheap until about 15 years ago. Although vibrant and beloved by artists and students, it had little industry, few jobs and a glut of derelict apartments. That all began to change as Berlin became the premier startup hub in continental Europe and big companies, such as Amazon.com Inc., Daimler AG and Sanofi, opened facilities.

While Berlin is the epicenter of the issue, rising rents have plagued cities across Germany, and affordable housing has become a feature on campaign platforms.

Under the deal, Vonovia will offer 53.03 euros in cash for each Deutsche Wohnen share, including a proposed dividend, the companies said in a statement late Monday, confirming an earlier Bloomberg News report. The bid represents about an 18% premium to Deutsche Wohnen’s Friday closing price.

The stock jumped as much as 16% to 52.38 euros on Tuesday. Vonovia’s shares fell as much as 6.8%, valuing the Bochum-based company at 28.7 billion euros.

Vonovia is planning a rights issue of as much as 8 billion euros after the completion of the transaction, expected in the second half. The companies anticipate 105 million euros in cost savings a year from the joint management of their portfolios.

Vonovia Upends German Apartment Market With $23 Billion Deal

The combination doesn’t come as a complete surprise. The offer marks the third time Vonovia has tried to acquire Deutsche Wohnen. A previous attempt failed in February 2016 after Vonovia couldn’t win enough support from investors in Deutsche Wohnen, which called that bid hostile and not in the best interests of shareholders.

Vonovia brought on advisers early last year to again consider the feasibility of a transaction, Bloomberg News reported at the time. In the end, it decided not to move forward with a bid.

Vonovia Upends German Apartment Market With $23 Billion Deal

The companies decided to pursue the transaction now after a mid-April decision by the German constitutional court to overturn a controversial rent freeze in Berlin. Buch said the ruling provided clarity for the property market.

The deal shows that Vonovia’s Buch was finally able to win over Deutsche Wohnen counterpart, Michael Zahn, after the two clashed over price about five years ago.

Zahn and Deutsche Wohnen Chief Financial Officer Philip Grosse are expected to be named to Vonovia’s management board after the acquisition, the companies said.

A takeover of Deutsche Wohnen would be Buch’s crowning achievement. The serial dealmaker built Vonovia into a European property heavyweight through several acquisitions, including the 2019 purchase of Swedish landlord Hembla AB and a 2016 deal for Austrian developer Conwert Immobilien Invest SE.

Vonovia was founded in 2015 after Deutsche Annington Immobilien SE, which Buch led, acquired Gagfah SA in what was a record German real-estate transaction at the time. The company traces its roots back over 100 years to housing companies built for German railway, steel and coal workers.

On this week’s transaction, Vonovia was advised by Perella Weinberg Partners Group LP, Morgan Stanley, Bank of America Corp. and Societe Generale SA as well as Freshfields Bruckhaus Deringer LLP. Deutsche Wohnen worked with 7Square GmbH, Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co. and UBS Group AG as well as Sullivan & Cromwell LLP.

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