German Mega-Landlord Deal Faces Investor Push-Back

(Bloomberg) --

German real-estate company ADO Properties SA’s plans to create one of the country’s biggest residential landlords is facing resistance from lenders to its parent company who say the deal breaches bond terms.

Bondholders to ADO’s Israel-based top shareholder ADO Group will demand repayment of about $300 million of shekel-denominated debt if the firm presses ahead with its purchase of Adler Real Estate Group and a stake in Consus Real Estate, according to a person familiar with the matter who asked not to be identified discussing private information. The creditors have outlined their view that the deal contravenes conditions for the debt in a filing with the Tel Aviv stock exchange.

The proposed merger -- first announced Dec. 15 -- would create an 8.6 billion euro ($9.5 billion) property empire by marrying ADO’s Berlin-centered assets with Adler’s presence across Germany. The deal was announced shortly after Adler completed an acquisition of ADO Group and overhauled its board.

However, S&P Global Ratings said in December, the deal would come at the cost of a weakened balance sheet, creating a highly leveraged entity that risked a downgrade to its credit score.

The shekel bonds have fallen 12 cents to 100 cents since the deal was disclosed, according to data compiled by Bloomberg.

Read more: ADO Properties May Lose Investment Grade Rating With Merger Deal

Separately, at least one of ADO’s shareholders, Canada’s Timbercreek Investment Management, is also opposing the transaction and asked German regulators to block it, according to one of its Hamburg-based portfolio managers Claudia Reich Floyd.

“We think there’s a big conflict of interest in this deal: ADO Properties didn’t consult with shareholders other than ADO Group for a transaction that clearly helps Adler’s investors,” said Reich Floyd, adding the complaint to Bafin is backed by other stockholders without disclosing their identities.

“We are now stuck with a highly leveraged company that has a totally different mix of properties,” she said.

Shares in ADO Properties, which counts BlackRock Inc. and The Vanguard Group Inc. among its biggest owners, have lost about a fifth of their value since the company announced the takeover.

“We believe that ADO Properties shareholders are short-changed from the proposed takeover of Adler and that the company has overpaid for the stake in Consus,” Tom Carstairs, an equity analyst at Commerzbank. wrote in a note to clients on Tuesday.

Representatives for ADO Properties said there are “no grounds” to support the bondholders’ demand for repayment. They also said the company is in “fruitful dialogue with Bafin,” regarding the deal and that regulators have not raised concerns about its structure.

A spokeswoman for Bafin declined to comment in line with the regulator’s policy to not confirm or deny specific complaints.

Last week, two board members of ADO’s parent company resigned, citing a lack of transparency around the transaction in a Jan. 30 letter published on the Tel Aviv stock exchange

Shares in Adler and Consus fell as much as 2% in Frankfurt on Wednesday.

©2020 Bloomberg L.P.

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