Street Protests and Rooftop Beers Herald Record Property Deal

The chants from thousands of protesters swarming the square were so deafening that the small entourage of executives, lawyers and bankers huddling in the red-brick office tower on Berlin’s Potsdamer Platz had to close the windows to drown out the noise some 20 floors below.

Unbeknownst to the demonstrators, the two polar opposites of the German rental market were within striking distance on this cloudy Sunday in the heart of the German capital: everyday citizens wielding posters demanding cheap housing for all and the nationalization of giant property companies, and the two largest private landlords plotting an audacious combination that stands to become a political lightning rod a few months before general elections.

Street Protests and Rooftop Beers Herald Record Property Deal

High above Berlin in the wedge-shaped building called the Kollhoff-Tower, representatives for German residential property firm Vonovia SE and Berlin-based rival Deutsche Wohnen SE were putting the final touches on a 19 billion-euro ($23.3 billion) takeover. All weekend, Vonovia Chief Executive Officer Rolf Buch and his Deutsche Wohnen counterpart, Michael Zahn, had shuffled discreetly in and out of the art-deco inspired building, home to law firm Freshfields Bruckhaus Deringer LLP.

Given the pandemic, everyone was required to take rapid Covid tests in the lobby before entering the offices, where people were spaced out and numbers were limited. Huddled over documents including a 40-some-page business combination agreement, the advisers could drop their masks, but a walk down the hallway for bathroom breaks or fresh air required them on.

The protests in the street below that called for an end to rents run amok were an unmistakable reminder that this was more than one major company on Germany’s benchmark DAX buying another. Rather, the combination would reverberate beyond the housing market, threatening to engulf politicians trying to chart a path between the thirst for low rents and the reality of soaring costs in this once unapologetically cheap city.

Known Quantity

This account of how the biggest European merger this year came together is based on conversations with people close to the negotiations, who requested not to be identified discussing private deliberations.

Several weeks before Buch and Zahn pushed their companies’ combination over the finishing line, Berlin Mayor Michael Mueller had organized a top-level gathering with property companies including Vonovia and Deutsche Wohnen.

Street Protests and Rooftop Beers Herald Record Property Deal

Mueller, who recently suffered a political defeat when a top court canceled a rent-freeze initiative championed by his government, had watched the swell of protests against rising rents grow louder. Now he demanded answers from the companies, increasingly identified in the public eye as the face for unaffordable housing.

Buch and Zahn soon began realizing that they needed to act if they hoped to counter any uncomfortable political demands. As major landlords, both companies faced the same issues in Berlin, and besides, the two executives weren’t strangers: over the past five years, several attempts to combine had been made, and on each occasion, talks had fizzled.

Now though, the time seemed right to rekindle their romance, and for Mueller, the two companies made an attractive concession: at a secret evening meeting between Buch and Mueller, the Vonovia CEO offered to sell about 20,000 apartments to the Berlin government, build some 13,000 new units and limit rent increases.

Mueller, the head of the left-leaning city-state, quickly realized he was being offered something tangible that he could present as a veritable trophy.

Late Leak

While the deal between the two parties only took on an around-the-clock urgency in the final stretch, their on-and-off relationship had carried on for years. One attempt failed in 2016 after Vonovia couldn’t win enough support from investors in Deutsche Wohnen, which called that bid hostile. And early last year, Buch brought on advisers to reconsider the feasibility of a transaction, Bloomberg News reported at the time. But in the end, it decided not to move forward with a bid.

Buch decided to give it another go and this time hit it off with Zahn. In this latest push, Deutsche Wohnen was code-named Sun, while Vonovia was Moon. The project was called Star.

But to make all the celestial bodies align, the executives and their entourage needed Mueller’s backing before a costly leak would sink their ambitious project.

The group was able to keep the lid on just long enough, until Bloomberg News revealed the plans mid afternoon on May 24. Their secret talks in the open, managers scrambled to put the final touches on the accord, which was announced late the same evening.

That night, a small circle of advisers gathered on the rooftop of the office tower, which offers sweeping vistas into the city’s eastern district with its Communism-era housing blocks and the lollipop-shaped television tower; and the old west with a giant Mercedes star looming over the broad shopping boulevards. Someone had arranged for a few bottles of Augustiner Helles and Berliner Pilsner beer that were cracked open to celebrate the victory.

Far down below on Potsdamer Platz, which until German reunification in 1990 had been a Cold War wasteland strewn with mines and barbed wire, the protesters had long cleared the crossing. Only a few discarded signs still littered the street, leftovers from the latest battle for Germany’s housing market.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.