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An office building of the German property group

By Alexander Hübner and Arno Schuetze

Germany’s two biggest listed landlords earlier this year revived merger plans, in a deal controversial in Germany because of tensions over soaring rents ahead of general elections in September. Executives have promised the merged company would work with politicians to provide affordable housing.

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If Vonovia buys another roughly 1,000 Deutsche Wohnen shares it would cross the 30% threshold that would oblige to make a mandatory offer for the entire company.

Vonovia held 22.3% of shares in Deutsche Wohnen directly as of Monday, compared with 18.4% previously, and has access to an additional 7.7% via instruments, a regulatory release published on Wednesday said.

Vonovia had offered 52 euros ($61.30) per Deutsche Wohnen share in a $22 billion offer, but Deutsche Wohnen shareholders did not tender enough shares by a deadline last week.

Vonovia’s failure to secure 50% of Deutsche Wohnen’s shares sparked criticism of German takeover law, whose peculiarities incentivise shareholders to hold on to their shares.

Hedge funds, which controlled about 35% of Deutsche Wohnen’s shares, tendered too little of their stock in the hope of getting more for them at a later stage.

Under German law, any acquirer can strike a so-called domination agreement once it crosses a 75% share ownership threshold, allowing it control of the target company’s cashflows. The acquirer must, however, in that case offer compensation to holdouts that is typically above the original offer price.

GAME THEORY

“It’s a typical game-theory dilemma: everyone believes that their position is more advantageous if everyone else accepts the offer, but you yourself don’t. Now everyone believes that – that’s why the risk of failure is so high”, said Christoph Seibt from law firm Freshfields, calling for a reform of the law.

Investment bankers agreed.

“The bidder should be given the opportunity to waive conditions after an offer expires – especially if it only narrowly failed,” said Joachim Ringer, Germany co-head at Credit Suisse, adding that the country’s takeover law puts Germany at a disadvantage to other economies.

Bank of America’s co-head of EMEA M&A Birger Berendes said that one solution could be to facilitate the delisting of the target company after an acquirer controls two thirds of the shares.

“(Such a delisting would be done at) the same price as the takeover offer. That would be a fair way for all shareholders,” he said. This would, in turn, deter investors from holding out.

However, some investors disagreed that takeover law was the reason Vonovia failed to secure a deal last week.

“It appears Vonovia underestimated Deutsche Wohnen’s broader shareholder base and instead hoped risk arbitrageurs would help it reach the minimum acceptance threshold,” Thomas Nienaber, Partner at hedge fund Aslan House Capital said.

And Union Investment portfolio manager Michael Muders had told weekly Wirtschaftswoche that his fund did not tender the 2% stake it owns as the offer price was unacceptable.

Management of Vonovia and Deutsche Wohnen was also at fault, a person who advised on the deal said.

“The CEOs felt too comfortable that their deal would go through and therefore spent too little time speaking to investors, the person said, requesting anonymity because they were not authorised to speak to the press.

Deutsche Wohnen declined to comment, while Vonovia was not immediately available.

($1 = 0.8482 euros)

(Additional reporting by Matthias Inverardi; editing by Barbara Lewis)

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