Deutsche Annington in €3.9bn property buy

Deutsche Annington has agreed to buy rival landlord Gagfah for €3.9bn in cash and shares, in a deal that would create a new German residential property giant.

The company is offering €122.52 in cash and five new Deutsche Annington shares for 14 Gagfah shares, or a combined value of €18 per Gagfah share. That represents a premium of 18 per cent on Gagfah's average price over the past three months.

The deal would create a company with a market capitalisation of about €9bn, making it the second-largest listed real estate company in Europe, behind Paris-based Unibail-Rodamco. It would also be a strong candidate to join the Dax list of 30 blue-chip German companies.

The combined company would hold around 350,000 households, which are worth about €21bn.

"Size matters in our business," Deutsche Annington chief financial officer Stefan Kirsten told an analyst call.

Bankers have long predicated further consolidation in the German residential sector which is highly fragmented and has drawn interest as a source of stability and yield during the economic crisis. Last year rival German landlord Deutsche Wohnentook over GSW Immobilien for €3.5bn.

Property prices have been climbing during the crisis as foreign investors began to see German property as a safe port in the storm.

Property has become a more popular asset class as Germans began to fret about their savings accounts generating meagre returns.

A surge in migration and the tendency of young people to want to live in cities has added to the surge in demand. This demand has kept ahead of the creation of new supply.

The government has responded by proposing a brake on rent increases and to make the landlord, not the tenant, responsible for estate agency fees.

Many more Germans rent their homes than is the case in other European countries.

There are now six major listed German residential groups, but these account for only 3 per cent of the overall market.

Deutsche Annington was listed by former owner Terra Firma, Guy Hands' private equity group, in 2013. Terra Firma has since sold a stake and transferred other shares to investors

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By acquiring Gagfah, Deutsche Annington would strengthen its footprint in the popular Berlin, Hamburg and Dresden markets, complementing its own position in western and southern Germany.

The boards of both companies have agreed the terms of the transaction. Rolf Buch, Deutsche Annington chief executive, is set to become CEO of the new group, with Thomas Zinnoecker, Gagfah chief executive, serving as his deputy. The merged company will be renamed at a later date.

The combined group is expected to generate €84m in annual synergies, in part by employing IT property management tools across the group.

Deutsche Annington will fund half of the offer through a capital increase, with the remainder financed via cash and a bridge loan underwritten by JP Morgan. The offer is conditional on over 50 per cent acceptance by Gagfah shareholders.

Gagfah's shares rose 12.8 per cent to €17.50 while Detusche Annington's declined 3 per cent to €25.09.

Germany has the largest listed residential market in Europe, with public companies owning over 1.1m units. However much of the German market remains fragmented and offers considerable scope for further consolidation, according to a report earlier this year.

The sector began to evolve in recent years when several major investors including banks and pension funds sold off portfolios of assets they built up before the financial crisis.

The sell-offs were the first evidence that European housing is moving towards a large-scale investor model similar to the multi-family sector in the US. More recently the Netherlands and Spain have also begun to see investors starting to build up portfolios of residential assets.

Additional reporting by Kate Allen in London

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