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Berlin 4 even more attractive after failed Deutsche Wohnen deal

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Yesterday, Deutsche Wohnen said that Vonovia’s hostile offer for the German property group was inadequate, a day after Deutsche Wohnen abandoned its own planned takeover of peer LEG.

That is a story of burning shareholder value,Chief Executive Michael Zahn said in an investor call, adding that Vonovia’s bid valued Deutsche Wohnen at 24.60 euros ($27.82) a share, while the intrinsic value was more than 26 euros a share.

Zahn said he had not done the best job in explaining strategic rationale of Deutsche Wohnen’s takeover plans for LEG, which he scrapped after failing to win shareholder support in face of the Vonovia offer.

Deutsche Wohnen urged its shareholders to reject the Vonovia offer, adding that on a standalone basis Deutsche Wohnen would create value, including through acquisitions.

Deutsche Wohnen has acquisition targets worth 2 billion euros in its pipeline and could buy peers worth 1 billion euros without tapping equity markets, Zahn said.

Vonovia’s cash-and-stock bid would value Deutsche Wohnen’s equity at EUR 9.92bn, in what would be the largest takeover in Germany’s rapidly consolidating residential property market. Including debt, the offer would be worth around EUR 14bn. According to its most recent quarterly report, Deutsche Wohnen values its property at EUR 10.3bn. This implied a premium of the Vinovia bid of 36%.

In the Nordic equity universe, we have previously highlighted the Danish company Berlin IV, which is 100% focused on the Berlin real estate market. Interestingly, Berlin IV announced on October 7th, that is has received an unsolicited approach, expressing a non-binding interest in acquiring a controlling stake in the company. According to Berlin IV management, the received expression of interest lists certain conditions that must be met before possibly triggering a voluntary offer. Furthermore, Berlin IV announced on October 7th, that it has been informed that some of its shareholders, including some members of the Board and management representing a significant proportion of voting rights and capital of the company, are positive towards participating in a voluntary offer, if such be made. Berlin IV also states that its Board has unanimously decided to initiate a strategic review and that the company will inform the market as soon as this is required.

We note that at current share price levels of around DKK 4,20, Berlin IV’s market cap is around EUR 166m. In combination with EUR 163m in debt, the current enterprise value is EUR 329m. In its recent FY 2014/2015 report, the company values its portfolio at EUR 293m. This implies that the current enterprise value marks a premium of 12%. This in turn implies that Berlin IV still looks attractively valued compared with Vonovia’s bid for Deutsche Wohnen.

The fact that Deutsche Wohnen now turned down Vonovia’s bid as too low, only highlights the upside in Berlin IV even more, in our opinion.

Nordic Investor

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