Germany's largest landlords agree €18bn merger amid expropriation calls

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The two largest listed property rental companies in Germany, Vonovia and Deutsche Wohnen, have agreed on merger terms in an €18 billion deal that is already facing a backlash over affordable housing just four months before general elections in September.

Under the terms of the deal - which comes five years after a failed earlier attempt but this time was reportedly agreed in under two weeks - Vonovia will pay €52 per share, with Deutsche Wohnen shareholders retaining the rights to a 1.03 dividend per share, amounting to an 18% premium on the company's closing price on Friday.

The two companies said in a statement that the merger was in the interests of its tenants.

"The necessary investments in affordable housing, climate protection and new construction can be better shouldered together following the combination of the two companies," the statement said, adding the aim of the merger is "to create a tenant-oriented and socially responsible housing company that can reliably contribute to necessary solutions".

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While the deal still requires approval from antitrust authorities, it is unlikely to encounter a problem in this regard due to a fragmented rental market, and a number of concessions on the companies' parts.

If the merger goes ahead, it will create the largest residential housing group in Europe with 550,000 properties in its portfolio worth €80 billion, and a combined market valuation of some €48 billion.

The biggest obstacle to the deal is regional politics especially in Berlin, where the scarcity of supply coupled with rapidly rising rents have made housing a contentious issue with the city seeing frequent protests over the problem. Of the 150,000 owned by Deutsche Wohnen, around 113,000 are located in the capital, while Vonovia has 43,000.

The deal must also be approved by the Berlin Senate, and in an attempt to win support, both companies have offered to sell around 20,000 apartments to the city, as well as agreeing to a 1% cap on rent increases for three years, and to construct additional housing in the capital where demand for affordable housing far outstrips supply.

Many local policymakers in Berlin have greeted the possible merger with scepticism. 

Florian Schmidt, a Green party councillor in charge of housing in the Friedrichshain-Kreuzberg district - the most rapidly-gentrifying part of the city, said: "This deal would trigger further concentration of real estate capital," adding that "the formerly public apartments are once again becoming the plaything of the financial markets."

Fabio De Masi, a parliamentarian from the left-wing Die Linke party urged the authorities to block the merger, saying: "The housing market is broken. Supply and demand do not just adjust like on the market for potatoes due to the long construction cycles and the limited availability of land."

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The merger announcement was made shortly after the "Deutsche Wohnen Enteignen" (Expropriate Deutsche Wohnen) campaign by tenants groups in Berlin announced that in its first month they had already received 130,000 out of 175,000 signatures required to force the Berlin authorities to hold a referendum on renationalising the company, which was privatised in 1998.

Last weekend also saw major demonstrations in support of the proposal and organisers say that they are confident that they will reach the required number before the end of June deadline.

Earlier today, campaign spokesman Rouzbeh Taheri tweeted his response to the news of the deal saying: "Rental shark eats rental shark: Raider is now called Twix, but nothing changes without expropriation - Vonovia buys Deutsche Wohnen."

A second tweet followed: "The pressure of our campaign is working: Deutsche Wohnen has decided in favour of a takeover by Vonovia in the hope that Berliners will no longer support the referendum by changing their name. We have brought a DAX company to its knees."

A recent survey conducted on behalf of German daily Tagesspiegel found that 47.1% of Berliners were in favour of expropriation, with 43.7% against the plan and 9.2% undecided.

A 2016 attempt by Vonovia to acquire Deutsche Wohnen in a hostile takeover failed to win the required acceptance by shareholders and was at the time vehemently opposed by the CEO Michael Zahn.

Zahn now says that he believes the time is right for the merger to take place. 

"The market environment has become increasingly similar for Vonovia and Deutsche Wohnen in recent years. Now is the right moment to combine the proven performance and strengths of both companies. Together we will create new perspectives for our employees, our tenants and our owners," he said.

It was reported in March that at the end of September 2020, Deutsche Wohnen was facing a total debt of just under €11.5 billion, which some analysts suggest is behind the volte-face.

Shares in Deutsche Wohnen rose 16.4% after the news broke while Vonovia shares fell by 6.8%.

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