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TLG merger move for Aroundtown gets chilly reception from market

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TLG merger move for Aroundtown gets chilly reception from market

Investors gave a frosty reception to the possibility of TLG IMMOBILIEN AG merging with Luxembourg-based Aroundtown SA, a deal that would create a company with a combined market capitalization of almost €12 billion.

TLG shares closed down 5.1% on Sept. 3 from its Aug. 30 closing price, while Aroundtown's slumped 2.8% during the same period. On Sept. 1, the companies announced plans to hold merger talks following TLG's acquisition of a 9.99% stake in Aroundtown from minority shareholder Avisco. TLG paid almost €1.02 billion for the stake from Avisco at €8.30 per share, a premium of 9.6% to Aroundtown's Aug. 30 closing price.

The fall in TLG's share price was expected, according to a Sep. 3 report from J.P. Morgan Cazenove analyst Tim Leckie. The move for Aroundtown is "another lurch in strategic direction undertaken by TLG in the past 18 months," he said.

TLG is buying a stake in Aroundtown that traded at an 8.33% discount to net asset value against its Aug. 30 closing price and a 12% discount to net asset value versus its Sept. 2 closing price, he added. "Should a merger fail to materialize, that's a theoretical €122 million hit to [TLG's] NAV or €1.09 per share," Leckie said.

The reasons for the fall in Aroundtown's share price were less apparent and left Leckie "puzzled," he said. The analyst expected Aroundtown's shares to rise toward the €8.30-per-share price that TLG paid Avisco.

Leckie said feedback from the market suggested the fall in Aroundtown's share price may have been due to investors reacting negatively to the prospect of being offered an exchange for TLG shares should a deal arise, and at an unknown price, despite Avisco having received a premium for its shares. TLG intends to propose a merger based on an exchange ratio guided by the then-prevailing EPRA NAV of the two companies.

"It is more likely, in our view, that investors demand the same price as Avisco received (€8.30) at a minimum in any deal," Leckie said. "It is our understanding that 75% of shareholders on both sides of the transaction need to approve the deal. We therefore can't see why [Aroundtown's] shares traded so poorly."

SNL Image
TLG's Campus Carre office asset in Frankfurt.
Source: TLG Immobilien

Analysts had greeted the announcement of the proposed merger positively due to the companies' complementary portfolios. TLG's assets are entirely in Germany, with almost half of its portfolio value derived from offices, around a quarter from retail, and the rest split between hotels and a development pipeline, according to the company's latest report as of the end of June.

Aroundtown's portfolio is predominantly in Germany, with around 30% of its portfolio value split between the Netherlands, the U.K. and other countries, its figures for the end of June show. Offices comprise 56% of Aroundtown's portfolio value, hotels 28%, and the rest is made up mostly of retail, logistics and wholesale properties.

"We see a strategic and local fit for the merger — strategically both are commercial players with a focus on office and hotel properties, Berlin, [a] value-add approach and major project development potential," Jefferies analyst Thomas Rothaeusler said in a Sept. 2 report. "As key rationale, we see scale benefits [including] cost synergies, increased project developments, improved transparency, [and] higher stock liquidity with DAX [index] potential as [the German listed real estate sector's largest] commercial player."

J.P. Morgan Cazenove's Leckie said TLG appears pretty committed to a deal given the resources it dedicated to the 9.99% stake purchase in Aroundtown. The analyst estimated that TLG had amassed €1.4 billion of firepower as a result of raising €1.07 billion of debt and €330 million from noncore disposals. The stake in Aroundtown and a put option it has in place for another 4.99% of Avisco's Aroundtown shares would leave TLG with nothing of that spare capacity left.

"TLG [is] out of firepower," Leckie said. "Should a transaction not occur, this raises the question of how to fund the development pipeline that starts to demand capital from 2020/2021."