European Event-Driven Analyst

Jesus Rodriguez Aguilar

Jesús is an Insight Provider (Event-driven) on the Smartkarma network, where he looks across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations. He has served as Economic and Business Advisor at the Spanish Congress in Madrid. Prior to that, he has worked in the City of London: as a Credit Analyst at Bloomberg; Event-driven associate at former boutique European Research; and doubled as Special Situations and Equity-linked VP (convertible bonds) at Merrill Lynch. Jesús has an MBA from the London Business School, a BA (Hons.) degree in Economics from the Complutense University in Madrid, and a BA (Hons.) in Law from U.N.E.D., also in Madrid.

Vonovia/Deutsche Wohnen: Update and Change of Recommendation

Vonovia/Deutsche Wohnen: Third Time Around

Vonovia Has Already 50.49% Of​Deutsche Wohnen

Event-Driven

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<p data-bind="visible: !isCollapsed(), html: content">On 24 May, <a href="https://www.smartkarma.com/entities/vonovia-se" target="_blank" data-smartkarma-citation="entities:21736:1" rel="noopener">Vonovia SE (VNA GR)</a> and <a href="https://www.smartkarma.com/entities/deutsche-wohnen-ag" target="_blank" data-smartkarma-citation="entities:21126:1" rel="noopener">Deutsche Wohnen AG (DWNI GR)</a> <a href="https://ir.deutsche-wohnen.com/websites/dewohnen/English/6100/news.html?newsID=2098744" target="_blank" rel="noopener">announced</a> they had signed an agreement on a voluntary public takeover offer to be launched Vonovia for the whole share capital Deutsche Wohnen next June. Shareholders will receive <strong>€52/share in cash</strong> <strong>plus a cash dividend of €1.03</strong> (tbd at the AGM of Deutsche Wohnen). There is a minimum acceptance threshold of over 50%. The combined company will carry the name "Vonovia SE".</p>
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<li>The offer represents an <strong>implied equity value of €17,876 mn</strong> and an <strong>implied EV of c. €29,384 mn</strong>.</li>
<li>The offer also represents a premium of approximately 17.9% on the closing price on 21 May 2021 and 25.0% on the 3-month VWAP.</li>
<li>Pricing ratios: 36.8 EV/Fwd EBITDA, 32.3x Fwd P/E, <strong>33.4x Deal value/est. FFO</strong> and <strong>101% Deal value/Consensus NAV</strong>. </li>
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<p data-bind="visible: !isCollapsed(), html: content">The operation makes strategic sense for both companies. The residential rental business offers low returns, therefore operating leverage and economies of scale are paramount. The resulting company would exceed 500,000 rental homes, valued at €85 bn and largely concentrated in Germany.</p>
<p data-bind="visible: !isCollapsed(), html: content">The <em>main beneficiary today is Deutsche Wohnen</em>, given that the price offered implies a premium of 18% over its price, even exceeding consensus NAV (€ 52.5 / share). M&amp;A in the sector is subject to acceptance by local authorities, hence the measures announced (see under "deal terms"). It also requires the target's support, the failed October 2015 hostile bid of Vonovia for Deutsche Wohnen is a good example.</p>
<p data-bind="visible: !isCollapsed(), html: content">In the case of Vonovia, the market will take the deal with some caution. Although it will allow it to increase Vonovia's profitability, it will probably have a dilutive effect in terms of NAV. An all-cash offer could bring Vonovia's LTV close to 60% hence equity will be used to bring LTV back to its stated 40-45% policy. The rights issue (26% of its market cap) will foreseeably be carried out with a strong discount over NAV (€ 63.22/share), since it closed on 21 May at a c. 18% discount.</p>
<p>The offer price seems <strong>bang-in-line with consensus NAV of €52.5/share (and with EPRA NNNAV of €52.8/share)</strong>. It also represents <strong>c. 4.4% FFO yield</strong> and is in line with Median Capital IQ consensus TP of is €52/share.</p>
<p>There has been <strong>no mention to synergies</strong> in the release though, but being conservative, €84 mn can be used (synergies estimated by Vonovia in the prior takeover attempt in 2015), taxed and capitalized, they could be worth <strong>up to €1.9/share</strong>.</p>
<p>The deal is <em>highly likely to close</em>. <strong>Gross spread is 1.6%</strong>, slightly <strong>over 6% annualised</strong>, <strong>provided shares are acquired prior to dividend payment</strong>. Recommendation is <strong>Long DWNI GR</strong>.</p>
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On 24 May, Vonovia SE (VNA GR) and Deutsche Wohnen AG (DWNI GR) announced they had signed an agreement on a voluntary public takeover offer to be launched Vonovia for the whole share capital Deutsche Wohnen next June. Shareholders will receive €52/share in cash plus a cash dividend of €1.03 (tbd at the AGM of Deutsche Wohnen). There is a minimum acceptance threshold of over 50%. The combined company will carry the name "Vonovia SE".

The offer represents an implied equity value of €17,876 mn and an implied EV of c. €29,384 mn.
The offer also represents a premium of approximately 17.9% on the closing price on 21 May 2021 and 25.0% on the 3-month VWAP.
Pricing ratios: 36.8 EV/Fwd EBITDA, 32.3x Fwd P/E, 33.4x Deal value/est. FFO and 101% Deal value/Consensus NAV. 

The operation makes strategic sense for both companies. The residential rental business offers low returns, therefore operating leverage and economies of scale are paramount. The resulting company would exceed 500,000 rental homes, valued at €85 bn and largely concentrated in Germany.
The main beneficiary today is Deutsche Wohnen, given that the price offered implies a premium of 18% over its price, even exceeding consensus NAV (€ 52.5 / share). M&amp;A in the sector is subject to acceptance by local authorities, hence the measures announced (see under "deal terms"). It also requires the target's support, the failed October 2015 hostile bid of Vonovia for Deutsche Wohnen is a good example.
In the case of Vonovia, the market will take the deal with some caution. Although it will allow it to increase Vonovia's profitability, it will probably have a dilutive effect in terms of NAV. An all-cash offer could bring Vonovia's LTV close to 60% hence equity will be used to bring LTV back to its stated 40-45% policy. The rights issue (26% of its market cap) will foreseeably be carried out with a strong discount over NAV (€ 63.22/share), since it closed on 21 May at a c. 18% discount.
The offer price seems bang-in-line with consensus NAV of €52.5/share (and with EPRA NNNAV of €52.8/share). It also represents c. 4.4% FFO yield and is in line with Median Capital IQ consensus TP of is €52/share.
There has been no mention to synergies in the release though, but being conservative, €84 mn can be used (synergies estimated by Vonovia in the prior takeover attempt in 2015), taxed and capitalized, they could be worth up to €1.9/share.
The deal is highly likely to close. Gross spread is 1.6%, slightly over 6% annualised, provided shares are acquired prior to dividend payment. Recommendation is Long DWNI GR.












  

Deutsche Wohnen

Vonovia/Deutsche Wohnen: Agreed Takeover