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Germany's biggest landlords agree $22 billion merger

FRANKFURT (Reuters) -Germany’s two biggest listed landlords Vonovia SE and Deutsche Wohnen have agreed to join forces in a 18 billion-euro ($22 billion) deal that risks stoking tensions over affordable housing in the run-up to general elections in September.

FILE PHOTO: An office building of the German property group Deutsche Wohnen is pictured in Berlin, Germany June 2, 2020. REUTERS/Fabrizio Bensch/File Photo

The country’s biggest merger this year, which will create a European real estate giant with 550,000 apartments, faces criticism in Berlin, where tenant rights and rising rents are a contentious issue.

But Fabio De Masi, a parliamentarian from the left-wing Linke party that is part of Berlin’s city government, urged the competition authorities to block it.

“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,” he said in an emailed statement.

Analysts say the deal should encounter few antitrust concerns in a fragmented market.

To try to secure support for the tie-up, the two companies pledged to limit regular rent increases to 1% per year in Berlin for the next three years and to inflation-adjusted increases for the following two years.

They said the merger was designed to help them work with politicians on providing affordable housing. They have offered to sell around 20,000 apartments to the city of Berlin, the Mayor of Berlin told a news conference.

The deal that sources said was agreed in less than two weeks could create a European real estate giant with 550,000 flats worth 80 billion euros and a combined market valuation of about 48 billion euros.

Under the agreed terms, Vonovia will pay 52 euros per share and Deutsche Wohnen shareholders will retain the rights to a 1.03 per share dividend, Vonovia said in a statement late on Monday.

This amounts to a premium of about 18% on the closing price on Friday.

Shares in Deutsche Wohnen rose as much as 16.4% on the news while Vonovia shares fell as much as 6.8%.

‘NO TENANT WILL BE HURT’

The chief executive of Vonovia, with property in Austrian, German and Swedish cities, cited a need to make apartments more energy efficient and more suitable for the elderly.

“The combination with Deutsche Wohnen now gives us the opportunity to effectively tackle these challenges,” Vonovia CEO said Rolf Buch.

“No tenant will be hurt by this transaction,” Deutsche Wohnen CEO Michael Zahn said.

Projected annual cost savings of 105 million euros from end-2024 will come mainly from shared technical services and property portfolio management for a combined number of apartments of over 500,000.

Vonovia said it had bridge financing of 22 billion euros for the deal, to be refinanced by measures including an 8 billion euro rights issue in the second half of 2021, following the transaction’s close.

“It makes sense strategically,” analysts at Jefferies said in a note, but added synergies were low.

Despite its substantial lead over other German residential property groups, Vonovia has only a 0.9% share in the fragmented German residential market, according to credit rating agency Scope, which has said that any takeover deal would face few antitrust concerns.

An earlier approach by Vonovia in 2016 failed to win the required acceptance from Deutsche Wohnen shareholders for a hostile 9.9 billion-euro takeover bid.

The proposed takeover offer will be subject to a minimum acceptance rate of 50% of the outstanding shares in Deutsche Wohnen.

($1 = 0.8187 euros)

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