Bloomberg reports that Vonovia is considering a new attempt to take over Deutsche Wohnen and thus its largest competitor in the German housing market. That would be the second try for Vonovia. In 2016 a takeover attempt already failed. In return, Vonovia took Südewo, before it then began to expand more strongly in Europe.
At the time, the failed takeover attempt did not have any serious consequences for investors. On the contrary, in recent years, Vonovia has been an exceptionally reliably growing company that has given its investors a lot of pleasure. The takeovers and the integration of the properties into the company’s portfolio made a significant contribution to this:
The merger would create a mega landlord
Deutsche Wohnen owns and operates about 163,000 apartments and 2,600 commercial real estates. Around 111,000 apartments are located in Berlin. Vonovia is much larger. In Germany alone, the company operates more than 350,000 residential units. Besides, there are further 50,000 residential units in Sweden and Austria. On the other hand, the share of residential units in Berlin are at 40,000 residential units. This is lower than for Deutsche Wohnen:
The question that immediately arises here is whether such a takeover could be approved by the Federal Cartel Office (FCO). What does the FCO do when it considers such mergers? Mostly, the competition authority wants to avoid the merger impedes competition. According to the FCO:
Effective competition is significantly impeded if with the merger the companies involved gain a scope of action that is no longer sufficiently controlled by competition. This would enable a company to raise its prices, lower product quality, cut back on innovation investments or worsen its offer in any other way without incurring the risk of losing its customers.
Such a situation can arise if, for example, the merger of two competitors leaves their customers without sufficient alternatives to switch to another supplier.German Federal Cartel Office
It can be summarized that merger control aims in particular to prevent the emergence or strengthening of market power. Such market power exists mainly in the following situations:
- there are no further competitors, or
- there isn’t any substantial competition, or
- the company concerned has a paramount market position compared to its competitors.
That said, I believe that the conditions are good for the Bundeskartellamt to grant clearance. The FCO has already dealt with the subsequently failed takeover in 2015 and has given its clearance. Although the companies have gained additional units since then, the FCO’s rationale for the release at the time should still apply today. The FCO has based its approval on the following reasons.
- The FCO stated that “private landlords, municipal housing companies, housing cooperatives, and other commercial providers are well represented in all the regions.”
- Furthermore, it emphasized the regulatory environment in Germany. In the case of a change of ownership, rents can only be raised subject to strict preconditions.
Berlin housing market
So let’s check the current situation. We limit ourselves here to Berlin, as the market overlap is likely to be greatest here. In total, both companies have approximately 150,000 residential units in Berlin. According to a broader analysis of the Berlin market for residential units, at the end of 2018, there were almost 327,000 residential buildings in Berlin with about 1.95 million apartments. Of these almost two million apartments, 75 percent were rented:
That said, we can already see that the merged entity will only account for a small part of the market. In Berlin, for example, almost 30 percent of apartments are rented out by communal landlords. This means that there is a great alternative to private companies and private landlords for those seeking an apartment. Of course, Deutsche Wohnen is one of the largest private landlords. However, the company does not have market shares that could create a dominant position. The current market shares of Deutsche Wohnen are about 6 percent. Accordingly, Vonovia and Deutsche Wohnen’s market shares are likely to remain below 10 percent. Hence, it would take a great deal of argument to deduce that the merger could impede competition.
In the event that a dominant market position is created in individual cities, both companies could simply offer so-called remedies. These would simply consist of the sale of individual properties. This would be the easiest way to address FCO concerns.
The bigger problem lies elsewhere
The bigger problem is that the project will meet with extreme political resistance. Both companies are the focus of criticism. The criticism focuses primarily on the profit-oriented business policy. The criticism primarily focuses on the profit-oriented business model. This applies above all to the renovations and subsequent high rent increases that Vonovia and Deutsche Wohnen have implemented in the past.
In this respect, the government in Berlin has introduced a highly controversial rent freeze. In this respect, many politicians would also be against the acquisition. That’s one side. But the other side is that I do not believe that the government could actually prevent the acquisition. It simply lacks the legal authority to do so.
If Vonovia and Deutsche Wohnen really want to complete the merger, then the FCO alone would be the decisive authority.
Vonovia and Deutsche Wohnen soon under one roof?
Vonovia has already published a press release that does not cast doubt on the merger rumor. Deutsche Wohnen has a market capitalization of EUR 13 billion. The NAV per share is approximately 20 percent above the current share price. Hence, it wouldn’t be the worse time for Vonovia to take over its competitor. But then it remains questionable whether the shareholders even want such a takeover. The main problem here is that Deutsche Wohnen operates a particularly large number of residential units in Berlin, and it is precisely there that most regulatory hurdles are to be expected. There is, therefore, a concern that Vonovia is buying little growth for a lot of money. And indeed, Vonovia should do everything possible not to lose its solid credit rating.
A takeover is not unlikely. At least it won’t fail because of the FCO. The greater challenge will be to convince politicians and especially shareholders that such a costly move makes sense. However, it will probably take some time before the rumor is confirmed. I do not expect any significant activities as long as COVID-19 still causes uncertainty in the markets. But then I give the whole thing a good chance that Vonovia will at least try to convince the investors that a takeover makes sense.
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