Deutsche Wohnen minority shareholder buyout (DPLTA)

Investments
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Assessment of the Deutsche Wohnen DPLTA

About DPLTA

  • A DPLTA can be concluded by a company once it achieves 75% voting rights (Vonovia has 87%).
  • The price offered is usually the greater of fair value, weighted price in the past three months preceding domination announcement or price offered to other shareholders in the last six months.
  • Shareholders who don’t want to participate in the DPLTA can retain their stake and will be paid a guaranteed annual dividend calculated based on the company’s historical earnings and future earnings prospects. The guaranteed dividend has generally been at least 5%.
  • If the some shareholders aren’t satisfied with the compensation, they can launch an appraisal proceeding in a court. The court can either dismiss the proceeding or raise the compensation-it can’t lower it.

Possible share exchange ratio
To establish the compensation that Deutsche Wohnen minority shareholders will receive, I looked at past DPLTA actions in Germany, one between Deutsche Wohnen AG and GSW Immobilien and another one between TLG IMMOBILIEN AG and WCM AG. In both cases, a discounted value and not the Net Asset Value (NAV) per share was used. The fair value arrived at was, however, not much different from the NAV. What is interesting is that the valuation expert for Deutsche Wohnen AG -GSW Immobilien had to compare the discounted value with the NAV to make sure that it was reasonable. Additionally, in the 2021 takeover of Deutsche wohnen shares by Vonovia, only the NAV was used as a valuation indicator. A joint statement by the two companies indicated that NAV was considered the main valuation indicator for the real estate industry. Therefore, I believe that the share exchange ratio in the Deutsche Wohnen DPLTA will probably be 1:1 given Deutsche Wohnen and Vonovia have a NAV of EUR 42.01 and EUR 44.08, respectively (confidence level: 70%). Below are my other arguments supporting this conclusion;

  • Turnaround in German real estate sector: According to insights, German real estate sector is beginning to stabilize. This will likely boost real estate shares in the near future. As such, Vonovia will likely offer an attractive offer in order to avoid squeezing out minority shareholders in future at a higher price.

  • One billion state tax: To achieve a squeeze-out, Vonovia will need to raise its stake to 90%. This will result in 1 billion euros state tax. I assume that Vonovia would want to avoid this until there is a complete pick up in the German real estate sector. Hence the best thing to do is offer attractive compensation.

  • Exchange of cash between Vonovia and Deutche Wohnen: If Vonovia doesn’t provide an attractive compensation, Elliot Investment (which has 3% stake) will probably hold on to its shares. This will be a constant headache for Vonovia whenever it wants to borrow funds from Deutsche Wohnen as seen in the past. I also assume that Vonovia wants to exert control over Deutsche Wohnen’s cash before a turnaround in German real estate sector fully materializes.

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