A tie-up between Germany’s TLG Immobilien and Luxembourg-domiciled Aroundtown would create a combine with over €25 bn of office and hotel assets.
Plans are accelerating for a merger between Germany’s TLG Immobilien and Luxembourg-domiciled Aroundtown, PropertyEU has learned, which could lead to the creation of Europe’s biggest office/hotel real estate specialist with assets worth in excess of €25 bn.
At the start of September, TLG Immobilien acquired a 9.99% stake in its Luxembourg-based peer Aroundtown from Avisco Group, the largest shareholder of Aroundtown, for €1.016 bn. The price agreed for the share deal was €8.30 per share, corresponding to the net asset value of Aroundtown as of June 30.
As part of the deal, TLG also entered into an option agreement for a further stake of up to 4.99% in Aroundtown. If TLG exercises this option, it would become the largest shareholder in Aroundtown.
As Oschrie Massatschi, Aroundtown’s executive director - capital markets, explains, the share deal marks the first practical step towards a merger between the two firms which would create a Europe-leading business with a primary focus on offices and hotels in Germany and the Netherlands. Aroundtown is currently Germany’s biggest hotel investor, as well as the country’s largest-listed commercial player.
‘It’s no secret that the biggest players on the German commercial real estate scene have all been considering potential mergers in recent years,’ says Massatschi. ‘Eventually we felt that combining with TLG would be a good match, probably the best out there.
'At the start of September, TLG brought a serious binding offer to the table, which saw Avisco sell a 9.99% stake at a price reflecting our Q2 NAV. This was important, I think, as it shows that Avisco was not negotiating to get a premium to NAV, as happens with many mergers, but leaving the upside to all shareholders to enjoy.’
By way of comparison, just a few days later Blackstone offered to take over Dream Global, at a circa 10% premium to NAV. The premium paid by Blackstone was only to Dream Global’s management company and not to all its shareholders.
Benefits of the merger
According to Massatschi, there are a number of key synergies between the firms. ‘We both focus on offices, and we both focus on Germany; TLG is very well positioned in top locations in areas such as Berlin, Leipzig, Dresden and Frankfurt; they also have a lot of potential from developments, so the portfolios will be very complementary.’
Massatschi doesn’t think that the dissimilarities will have a negative effect. ‘One is based in Germany, the other domiciled in Luxembourg. One is four times bigger than the other, and neither wants to jeopardise their good rating. There’s also the matter of getting the green light from the German competition authorities. TLG have rightly requested a seat on the board, so they will get that in the next few months.’
But the benefits would be overwhelmingly positive, Massatschi says. ‘We never aimed for size; that is a side effect, but it offers us the potential of DAX inclusion, so overall will improve our liquidity, our free float. Furthermore, we think that the merger will improve our rating.
TLG has a lot of development projects, which rating agencies don’t like so much, so they will benefit from joining with our extensive business operations by lowering their exposure to construction activity. Meanwhile, we believe that Aroundtown’s BBB+ rating with S&P could potentially rise to A-. That of course would give us an increased 30-50 basis points discount on our financing costs. Right now, we both stand at an average cost of debt of around 1.7%. We can currently refinance at just under 1%, but this will help drive down the expense further.’
Executing the deal
‘The next step of the merger will be for both sides to complete their due diligence. If these talks succeed, concrete merger conditions will be announced by June 2020 at the latest. Then there’s a put/call option that gives TLG the option to buy an additional 4.99% stake from Avisco, again at Q2 NAV, even though there is a big chance that the NAV by then will be higher in Q3 and Q4. They have up until the end of February 2020 to exercise this option,’ Massatschi adds.
‘In executing the deal, our main shareholder Avisco has told us that while they are selling a significant stake, they still remain committed with a very large position, currently worth about €1.3 bn, even after divesting the 14.99% - they are simply diversifying their own portfolio.
In terms of the hotly contested merger scene in Germany today, the deal also helps both parties. ‘By merging the two companies, we are removing the risk of TLG teaming up with another competitor and creating a much bigger competitor than exists on the market today.
‘There is no one else focusing on value-add as much as we do today across so many markets. In the future I think we will become an even stronger player in the market, and it will become even more difficult for other peers to challenge us in terms of scope, scale, access to capital markets, liquidity, and access also to capital pools, as we are very active from an investor relations point of view, pretty much across all continents.’
Aroundtown’s annus mirabilis
The merger announcement has come on the back of a flurry of deals – ‘perhaps Aroundtown’s strongest ever H1,’ Massatschi confirms. At its six-month results presentation, the firm said it had executed some €2.5 bn of deals in the first half of the year, ‘of which €1.2 bn has already been closed. We’ll complete on the remaining €1.3 bn in the second half of the year, and also have another €1 bn of pre-filtered deals in the works.’
This extraordinary volume has in part been achieved thanks to two mammoth and atypical deals this year – the signing of an agreement for just under €1 bn with Blackstone for a portfolio of Center Parc assets in Belgium, the Netherlands and Germany, as well as the purchase of the Siemens Campus in Munich, Germany for slightly less.
‘We don’t usually favour portfolio deals – we prefer to cherry pick assets in the €40 mln to €100 mln range,’ says Massatschi. ‘But these deals were unmissable. Center Parcs was a fairly unique deal as we are starting with a high yield. Usually when we acquire an asset, the yield can vary a lot, simply because our focus is on value-add acquisitions. However here we’ve inherited a capex programme which we’ll complete on behalf of the seller, which has another three years to completion and then we’ll be already at around 7% yield on total cost.
It’s a very well run and managed portfolio, because the earnings come not only from 7% yield on the asset, but also a 7% yield to the operator – making it very accretive. The 15-year lease means a very long-term stable cash flow as well.’
The merger deal aside, Aroundtown continues to pursue a strategy of ‘being ready for any market scenario’.
‘We love diversification, and I think that in today’s competitive landscape, even if you believe that one market is strong and you should just focus on that, the next minute something can happen,’ Massatschi says. ‘We’ve been seeing that with Berlin residential right now. In the past we were asked, why don’t you buy much more Berlin residential, everybody was very bullish on Berlin (including us), but we were also very cautious and wanted to make sure that we didn’t put all our eggs into one basket.
‘So from a diversification perspective, we are already across Europe, predominantly in Germany and the Netherlands, because we believe that these are the two strongest economies and long term, the most stable ones. In the hotel segment, we are even further diversified, we are in the UK, Vienna, Brussels, Rome - we just acquired a 750-room Marriott hotel in Paris. I think today about 10% of our portfolio is outside our two core markets, and that might increase over the long term to 20-25%. While offices and hotels are the two main segments, we also have some last-mile, inner-city logistics.
‘We were looking at London and Paris for many years. But we only entered Paris in the last few weeks, and London we’ve only started to invest in the last two years, since the whole Brexit scenario started. It brought some special situations of some owners to the surface which creates accretive opportunities for long-term companies like ours,’ says Massatschi.
‘On top of that, we recently acquired a 19% stake in the CEE market player, Globalworth. They are what I see as the dominant player in those markets, focusing specifically on Poland and Romania. But this is passive investment so far. They run the show. We just enjoy the diversification and the exposure to the Eastern European markets.’
Massatschi concludes: ‘As a sign of how much we like diversification, we’ve also diversified on a financing level. So we’ve not just issued bonds in Europe, but in 10 more currencies, ranging from HK Dollars to Norwegian Krona, US Dollars, British Pounds, Australian and Canadian dollars. All these bonds have been hedged to Euro in order to avoid any non-euro currency exposure. It’s all about being ready for any market scenario.’