Annex 1 To the Invitation to the Extraordinary General Meeting on Wednesday, 28 October, 2015 at 10 A.M. (CET) Deutsche Wohnen AG Frankfurt am Main, Germany ISIN DE000A0HN5C6 WKN A0HN5C Report of the Management Board pursuant to section 186, para. 4, sentence 2 of the German Stock Corporation Act (“AktG”) on agenda item 1 for the Extraordinary General Meeting to be held on Wednesday, 28 October 2015 regarding the reason for the exclusion of shareholders’ subscription rights
99
Embed
Frankfurt am Main, Germany ISIN DE000A0HN5C6 WKN …€¦ · Frankfurt am Main, Germany ISIN DE000A0HN5C6 WKN A0HN5C Report of the Management Board pursuant to section 186, para.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Annex 1
To the Invitation to the Extraordinary General Meeting
on Wednesday, 28 October, 2015 at 10 A.M. (CET)
Deutsche Wohnen AG
Frankfurt am Main, Germany
ISIN DE000A0HN5C6
WKN A0HN5C
Report of the Management Board pursuant to section 186, para. 4, sentence 2 of the German
Stock Corporation Act (“AktG”) on agenda item 1 for the Extraordinary General Meeting to be
held on Wednesday, 28 October 2015 regarding the reason for the exclusion of shareholders’
subscription rights
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 2 -
I.
The management board (the „Management Board“) and the supervisory board (the „Supervisory
Board“) of Deutsche Wohnen AG, with its registered office in Frankfurt am Main, Germany
(“Deutsche Wohnen AG” or the “Company”), propose the following to the general meeting
(“General Meeting”):
Increase of the Company’s Share Capital against Contributions in kind with the
Exclusion of the Shareholders’ Subscription Rights and Authorization for the
Amendment of the Articles of Association
II.
The individual proposed resolution is as follows:
Increase of the Company’s Share Capital against Contributions in kind with the
Exclusion of the Shareholders’ Subscription Rights and Authorization for the
Amendment of the Articles of Association
1. The Company’s current share capital, which is currently registered with the
commercial register (Handelsregister) as EUR 336,426,511.00, divided into
336,426,511 ordinary bearer shares with no par value, each with a notional
value of EUR 1.00, will be increased by up to EUR 213,127,385.00 to up to
EUR 549,553,896.00 through the issuance of up to 213,127,385 ordinary
bearer shares with no par value (Stückaktien), each with a notional value of
EUR 1.00 (the “New Shares”), against contributions in kind.
The issue amount (Ausgabebetrag) of the New Shares is EUR 1.00. The
difference between the issue amount (Ausgabebetrag) of the New Shares and
the contribution value (Einbringungswert) of the contributions in kind shall be
allocated to the capital reserve pursuant to section 272, para. 2, no. 4 of the
German Commercial Code (the “HGB”).
2. The New Shares carry full dividend rights as of 1 January 2015.
3. The subscription rights of the shareholders of Deutsche Wohnen AG are
excluded. The shares resulting from the capital increase against contributions
in kind will be issued in connection with a takeover offer to the shareholders
of LEG Immobilien AG pursuant to sections 29 et seq. of the German
Securities Acquisition and Takeover Act (the “WpÜG”) by way of the
Exchange Offer for the purchase of all shares held by the shareholders of LEG
Immobilien AG at a ratio of 1:3.30. Each shareholder of LEG Immobilien AG
is therefore entitled to receive 3.30 New Shares in exchange for each tendered
LEG Share.
4. UBS Deutschland AG, Opernturm, Bockenheimer Landstraße 2-4, 60306
Frankfurt am Main, Germany, and DZ Bank AG Deutsche Zentral-
Genossenschaftsbank, Frankfurt am Main, Platz der Republik, 60265
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 3 -
Frankfurt am Main, Germany, will, in general, each subscribe for half of the
New Shares in their capacity as Exchange Trustees (Umtauschtreuhänder) for
the shareholders of LEG Immobilien AG that have accepted the Exchange
Offer. Accordingly, the Exchange Trustees are hereby permitted to subscribe
for the New Shares and will contribute the LEG Shares tendered for the
exchange, as far as they are subject to the capital increase against
contributions in kind, as contributor in kind (Sacheinleger) in Deutsche
Wohnen AG.
5. The capital increase against contributions in kind shall only be implemented to
the extent to which the New Shares have been subscribed for by the Exchange
Trustees by the deadline stipulated in no. 9.
6. The Management Board intends to refrain from an appraisal of the
contributions in kind (section 183, para. 3 of the German Stock Corporation
Act (the “AktG”)) pursuant to sections 183a, 33a of the AktG.
7. The Management Board is authorized to determine further details regarding
the implementation of the capital increase against contributions in kind.
8. The Supervisory Board is authorized to amend the articles of association
according to the implementation of the capital increase against contributions in
kind.
9. The resolution concerning the increase of the share capital against
contributions in kind will become null and void if the completion of the capital
increase has not been filed for entry in the commercial register
(Handelsregister) within three months following the entry of this resolution in
the commercial register (Handelsregister), and in any event no later than
16 May 2016. The Management Board and the chairman of the Supervisory
Board are instructed to file for the entry of the resolution concerning the
increase of the share capital against contributions in kind in the commercial
register (Handelsregister) without undue delay once the requirements for its
registration have been met (in particular, in the event of pending rescission
actions (Anfechtungsklagen) upon the conclusion of a release procedure
(Freigabeverfahren) pursuant to section 246a of the AktG).
The Management Board is authorized to file for the entry of the resolution in the
commercial register (Handelsregister) as soon as the conditions of the resolution have
been met.
The base amount (Ausgangsbetrag) for the capital increase which is described in the
proposed resolution is based on the amount of share capital currently registered with the
commercial register (Handelsregister). Since 1 January 2015, additional shares of the
Company from conditional capital have been issued to former shareholders of GSW
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 4 -
Immobilien AG who have exerted their right to compensation based on the domination
agreement concluded between the Company and GSW Immobilien AG. It is possible that
other shareholders of GSW Immobilien AG may exert their right to compensation until the
resolution regarding the capital increase is proposed or the capital increase is implemented.
The corresponding increases out of the conditional capital have not yet been registered with
the commercial register (Handelsregister).
III.
The Management Board of Deutsche Wohnen intends to acquire an interest in LEG by means of an
Exchange Offer and to subsequently integrate LEG into the Deutsche Wohnen Group.
Today, the Management Board has concluded a Business Combination Agreement
(Grundsatzvereinbarung) with LEG with respect to the public takeover offer and the future strategy
and structure of the newly created company group (see III.2.e) below).
In the context of the Exchange Offer, shares of Deutsche Wohnen shall be offered to the shareholders
of LEG. The shares of Deutsche Wohnen shall be issued by means of the proposed capital increase
against contributions in kind and – depending on the number of tendered LEG Shares – possibly also
by means of a capital increase from authorized capital. Because the shares issued by means of the
capital increases shall be offered in exchange for LEG Shares, the subscription rights of the
shareholders of Deutsche Wohnen will be excluded for the proposed capital increase against
contributions in kind.
Hereinafter, the Management Board reports on the reason for the exclusion of subscription rights for
the proposed capital increase against contributions in kind pursuant to section 186, para. 4, sentence 2
of the AktG. This report first describes the background of the planned transaction and the planned
transaction itself in this section III. In particular, this involves the description of Deutsche Wohnen
and LEG, the market environment and the business conditions of the transaction, the expected
synergies resulting from the transaction and an explanation of the valuation of the companies involved
in the transaction.
In section IV., the objective justification for the exclusion of subscription rights in the context of the
capital increase against contributions in kind will be given with regard to the purpose of the capital
measure.
1. Background of the Planned Transaction
a) Deutsche Wohnen
(1) Business activities
Deutsche Wohnen, with its registered office in Frankfurt am Main and its
principal place of business in Berlin, is currently one of the largest publicly
listed real estate stock companies in Germany, based on market capitalization.
The Company is active in residential property management, especially in
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 5 -
letting residential units owned by the Company, management of its residential
portfolio and the sale of select residential properties. Through one of its
participations in another company, it also operates nursing homes and assisted
living facilities. In the context of this business strategy, Deutsche Wohnen
focuses on residential and nursing care real estate properties in high-growth
metropolitan regions in Germany. These include the greater Berlin area, the
Rhine-Main region, Mannheim/Ludwigshafen, the Rhineland and Dresden.
Other important areas include stable urban regions such as Hanover/Brunswick,
Magdeburg, Kiel/Lübeck, Halle/Leipzig and Erfurt. Deutsche Wohnen is listed
in Deutsche Börse’s MDAX Index.
(2) Segments
Deutsche Wohnenʼs business is divided into “Residential Property
Management”, “Sales” and “Nursing and Assisted Living Homes” segments.
The “Residential Property Management” segment is the core and focus of its
business, covering all activities in connection with the management and
administration of residential properties, management of lease contracts and
services for tenants. The “Sales” segment covers all activities relating to the
sale of residential units, buildings and land. Deutsche Wohnen AG’s
residential portfolio earmarked for sale is subdivided into block sales
(institutional sales) and single-unit privatization (residential property
privatization). The residential portfolio for block sales mainly includes
residential units in the so-called non-core regions that are not part of the
business strategy of Deutsche Wohnen as well as opportunistic sales. In
connection with single-unit privatizations, Deutsche Wohnen mainly seeks to
sell residential units to owner-occupants and investors. In its “Nursing and
Assisted Living Homes” segment Deutsche Wohnen predominantly manages
and markets its own nursing and residential properties for senior citizens
through one of ist participations in another company under the brand
KATHARINENHOF®.
(3) Portfolio
As of 30 June 2015, Deutsche Wohnen’s residential property portfolio
comprised 141,943 residential units with a total residential floor space of
approximately 8.6 million square metres, based on the total residential floor
space listed in the rental contracts. As of 30 June 2015, the average monthly
contractual rent, based on Deutsche Wohnen’s total residential portfolio,
amounted to EUR 5.78 per square metre. The vacancy rate as of this date was
roughly 2.10%. In addition to residential properties, as of 30 June 2015,
Deutsche Wohnen’s real estate portfolio included 2,072 commercial property
units with a total floor space of approximately 0.3 million square metres based
on the total commercial area listed in the rental agreements, as well as a total
of 30,502 parking garages, underground garage spaces and parking spaces.
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 6 -
The residential real estate portfolio was evaluated by an external independent
appraiser – CBRE GmbH, Frankfurt (“CBRE”) – as of 30 June 2015 using a
DCF model in accordance with the standards of the Royal Institution of
Chartered Surveyors (RICS) in line with the Red Book, with the exception of
real estate properties for senior citizens used by Katharinenhof, for which the
appraisal as of 30 June 2014 was maintained. According to this appraisal, the
real estate portfolio of Deutsche Wohnen is valued at approximately EUR
10.283 billion (including commercial properties and undeveloped land,
excluding the senior citizen properties used by Katharinenhof) as of 30 June
2015. Deutsche Wohnen’s real estate properties for senior citizens used by
Katharinenhof were valued at EUR 143.8 million by CBRE as of 30 June 2014.
The data calculated by CBRE was updated (fortgeschrieben) by Deutsche
Wohnen in the interim report dated 30 June 2015. According to this report, the
market value as of 30 June 2015 is EUR 143.8 million.
Deutsche Wohnen’s residential real estate portfolio is currently classified into
strategic core- and growth-regions, as well as non-core regions. Within the
strategic core- and growth-regions, Deutsche Wohnen makes a further
distinction between core+-and core-regions.
Core+-regions are dynamic markets in which Deutsche Wohnen sees
considerable potential for rent price increases and a positive market
environment for sales. These markets are characterized by a demand surplus
for residential space. This is the result of a dynamic economic development
and an increase in households, inter alia due to an increase in single-person
households. Deutsche Wohnen’s core+-regions are the metropolitan regions of
(i) greater Berlin, (ii) Rhine-Main, (iii) Mannheim/Ludwigshafen, (iv) the
Rhineland and (v) Dresden. Based on the number of units, approximately 87%
of the units in the residential real estate portfolio were in the core+-regions as
of 30 June 2015.
By contrast, core-regions are regions with a market development that is
expected to be stable. These markets are characterized by a balanced supply
and demand situation, a good economic situation, a stable economic outlook,
average purchasing power and a steady number of households. In particular,
Deutsche Wohnen’s core-regions are (i) Hanover/Brunswick, (ii) Magdeburg,
(iii) Kiel/Lübeck, (iv) Halle/Leipzig, (v) Erfurt and (vi) Other. Based on the
number of units, approximately 11% of the units in the residential real estate
portfolio were in the core-regions as of 30 June 2015.
Non-core-regions are defined as geographic regions where the development is
stagnant and/or there is a negative trend. They include mainly rural areas and
scattered properties. Based on the number of units, approximately 2% of the
units in the residential real estate portfolio were in the non-core-regions as of
30 June 2015.
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 7 -
In the course of the merger of Deutsche Wohnen and LEG, it is intended to
reclassify the residential real estate portfolio, with a focus on distinguishing
among “core+”, “core” and “high-yield-regions”. The reclassification will take
account of the new circumstances of the merged company and the diversified
regional portfolio. The core+-regions will include greater Berlin, the Rhineland,
Münsterland, Rhine-Main, Mannheim/Ludwigshafen and Dresden. The core-
regions will be defined as the geographic regions of Ostwestfalen, the core
cities of the Ruhr region, Hanover/Brunswick, the Lower Rhine, Kiel/Lübeck
and the core cities of the new federal states. The High-Yield regions will
include the rest of the Ruhr region, Bergisches Land/Sauerland, the rest of the
new federal states and all other regions.
(4) Share capital
The Company’s share capital is currently registered with the commercial
register (Handelsregister) as EUR 336,426,511.00, divided into 336,426,511
ordinary bearer shares, each with a notional value of EUR 1.00. Since 1
January 2015, in addition to this amount, shares of the Company from
conditional capital have been issued to former shareholders of GSW
Immobilien AG who have exerted their right to compensation based on the
domination agreement concluded between the Company and GSW Immobilien
AG. It is possible that other shareholders of GSW Immobilien AG may exert
their right to compensation until the resolution regarding the capital increase is
proposed or the capital increase is implemented. The corresponding increases
in conditional capital have not yet been registered with the commercial register
(Handelsregister).
b) LEG
(1) Business activities
LEG is a publicly traded real estate company with its seat of business in
Düsseldorf. The business model of LEG is focused on the letting and
management of residential units with a clear focus on North Rhine-Westphalia.
This business activity is complemented by the sale of residential units via LEG
Consult GmbH, a subsidiary of LEG. Erste WohnServicePlus GmbH,
Düsseldorf, a subsidiary of LEG, offers (in cooperation with Unitymedia
GmbH) multimedia products for LEG’s residential properties, and
EnergieServicePlus GmbH, Düsseldorf, of which LEG holds 51% of the
shares and RWE Vertrieb AG holds 49%, will assume responsibility for the
complete energy and technical management and supply of LEG properties.
(2) Segments
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 8 -
LEG’s business is divided into the “Residential” and “Other” segments. The
“Residential” segment includes all residential and commercial properties, own-
used buildings, property companies (Bestandsgesellschaften) and LEG
Wohnen NRW. Real estate portfolios which have evolved from completed
project developments to long-term leasing and which are solely owned by the
group are also maintained in the “Residential” segment.
The “Other” segment includes development companies as well as the
companies LEG Management GmbH and LCS Consulting und Service GmbH.
Let properties that are available for sale from the development business are
also recognized in the “Other” segment. LEG Management GmbH, which is
included in the “Other” segment, focuses primarily on services in connection
with administrative functions and group management.
(3) Portfolio
By its own account, as of 30 June 2015, LEG’s real estate portfolio comprises
107,347 residential units, 1,059 commercial units and 26,648 parking garages
and parking spaces. The total living space amounts to roughly 6.9 million
square metres and the average rent for residential units of the total portfolio
amounted to EUR 5.16 per square metre as of 30 June 2015. As of this date,
the vacancy rate for residential units was 3.30%.
According to LEG, the portfolio can be classified into Growth Markets
(Wachstumsmärkte), Stable Markets (Stabile Märkte) and Higher-Yielding
Markets (Märkte mit höheren Renditen). According to its 2015 semi-annual
report, 33,574 residential units are situated in Growth Markets, with a vacancy
rate of 1.50% and an average rent of EUR 5.79 per square metre. According to
LEG, this price is below the average rent in the respective markets, meaning
that there is a rental potential of 18.00% here. 42,638 residential units are
situated in the Stable Markets segment, with a vacancy rate of 3.70% and an
average rent of EUR 4.89 per square metre. The rental potential here is
identified as 9.00%. In Higher-Yielding Markets, there are, according to LEG,
29,678 residential units with a vacancy rate of 5.30% and an average rent of
EUR 4.78 per square metre. The rental potential here is identified as 8.00%.
According to information provided by LEG in its report for Q2 2015 dated
14 August 2015, the overall portfolio was worth approximately EUR 6 billion
as of 30 June 2015.
In the course of the merger of Deutsche Wohnen and LEG, it is intended to
reclassify the residential real estate portfolio, with a focus on distinguishing
among “core+”, “core” and “high-yield-regions”. The reclassification will take
account of the new circumstances of the merged company and the diversified
regional portfolio (see section III.1.a)(3) above). It is possible that the future
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 9 -
assessment of the quality of LEG’s markets and sub-portfolios by Deutsche
Wohnen may deviate from the current assessment by LEG as part of this
reclassification of the real estate portfolio.
(4) Share capital
LEG’s current share capital is EUR 58,259,788.00, divided into 58,259,788
registered shares, each with a notional value of EUR 1.00.
LEG has also issued convertible bonds with a nominal value of EUR 300
million (final maturity: 1 July 2021). A complete exercise of the conversion
rights, would, at the current conversion price of EUR 58.4317, lead to the
issuance of approximately 5.13 million shares and thus increase the total
number of shares by about 8.8%.
A change of control as a result of the Exchange Offer would trigger a “Change
of Control” provision under the terms and conditions of the convertible bonds,
according to which the bond holder may, under certain circumstances within
the additional acceptance period pursuant to section 16 of the WpÜG demand,
next to the immediate calling in of the bond its immediate conversion into
LEG Shares at a lower conversion price.
“Change of control” in connection with the Company’s Exchange Offer means
the fulfillment of all offer conditions (including any minimum acceptance
threshold within the offer) that have to occur before the end of the acceptance
period.
In the event of a conversion as a result of a change of control, the conversion
price will be reduced according to the following formula:
Where:
CPa = the adjusted conversion price;
CP = the conversion price on the day directly preceding the day on which the
change of control occurs;
Pr = the initial conversion premium of 30%;
c = the number of days from the day on which the change of control occurs
(inclusive) to the maturity date (exclusive); and
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 10 -
t = the number of days from the day on which the the bonds are issued
(inclusive) to the maturity date (exclusive).
A complete exercise of the conversion rights in the event of an assumed
change of control on 1 December 2015 would result in the issuance of roughly
6,324,268 shares and thus increase the total number of shares by about 10.9%.
c) Competitive advantages and synergies resulting from the acquisition of LEG
With the merger of Deutsche Wohnen and LEG, Deutsche Wohnen is
acquiring a high-quality real estate portfolio that provides additional growth
options with an attractive risk/return profile.
(1) Focused combined real estate portfolio with more than 90% of the market
value based on the market value in core+-and core-regions
The combined company will have a focused residential property portfolio of
roughly 250,000 units. This corresponds to an increase of the current portfolio
of Deutsche Wohnen by approximately 107,000 units, or an increase by
around 75% according to the published figures for Deutsche Wohnen and LEG
for the first half of 2015. Additionally, the strong regional concentration of the
combined portfolio enables a continued high management efficiency (see more
on this below).
The portfolio of LEG is primarily located in dynamic markets with
considerable rent increase potential (about 42% based on the market value
(Fair Value)) as well as markets with stable rents (about 36% based on the
market value). The merger with LEG will thus enable Deutsche Wohnen to
increase the number of residential units in its core+-and core-regions
significantly. These markets will make up more than 90% of the combined
portfolio based on the market value after comnpletion of the transaction.
As a result, the core+-portfolio for the combined company will expand from
roughly 123,000 to roughly 157,000 units, primarily through acquisitions in
the Rhineland and Münsterland, and the core-portfolio will increase from
roughly 16,000 to roughly 58,000 units, primarily through acquisitions in core
cities in the Ruhr region and in Ostwestfalen. Based on the market value, about
73% of the combined portfolio will be in core+-regions and 18% in core-
regions. Berlin’s share of the combined portfolio will be almost 50% in terms
of market value, and, looking forward, it will thus represent a significant
growth driver for Deutsche Wohnen.
In addition, after the transaction about 10% (in terms of market value) of the
units in the combined portfolio will be in regions with above-average returns
(so called high yield Markets), which will contribute to an improvement in the
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 11 -
return profile of Deutsche Wohnen. Significant sell-off portfolios were not
identified by the Management Board on the basis of public information.
The enlarged combined portfolio will enable Deutsche Wohnen to conduct
more active portfolio management through rent management, opportunities for
rounding out the portfolio (Arrondierung) and additional privatization
potential, and thus earn additional increases in revenue and returns. Achieving
critical mass in new core+-and core-regions will also provide additional
opportunities for external growth.
(2) Considerable synergy potential
The merger of the two companies will result in standardized structures and
processes. The Management Board of Deutsche Wohnen believes that,
following the integration, there will be revenue and cost synergies with a
positive effect on the combined FFO (without disposals) of approximately
EUR 35 million per year, before taxes. In addition, the Management Board
expects that the merger will increase the long-term privatization potential by
about 1,500 units, with an additional contribution to earnings
(Ergebnisbeitrag) of about EUR 20 million before taxes each year. Thus, a
total additional contribution to earnings (Ergebnisbeitrag) of about EUR 55
million before taxes per year is expected for the combined FFO (including
disposals).
The Management Board expects that these synergies can be fully realized
within four years after the implementaion of the transaction.
The expected synergy potential mainly arises from the following areas:
Reducing administrative costs (personnel and material costs): The cost ratio
for personnel and material costs, measured on the basis of rental rates, was
about 14.5% at Deutsche Wohnen in the fiscal year 2014. As a result of
scaling effects, the acquisitions carried out in recent years, including GSW
Immobilien AG, were integrated in the Deutsche Wohnen Group with a cost
ratio of about 5 to 10%. For 2015, the Management Board therefore expects
to be able to further reduce Deutsche Wohnen’s cost ratio for personnel and
material costs to about 12% of the rental rates. Based on this experience and
its integration track record, the Management Board expects, as a result of the
merger of Deutsche Wohnen and LEG, to be able to realize considerable cost
reductions through a simplified corporate structure, particularly by unifying
of holding functions, joint contract management and a standardized IT
infrastructure. In the medium term, it targets a cost ratio for personnel and
material costs in the joint company ranging from 11 to 12%.
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 12 -
Consolidation of the West German operating platforms: The West German
portfolio of Deutsche Wohnen and LEG reveals potentials for optimization in
the local management of the holdings. Management costs per residential unit
are typically heavily dependent on the concentration of the holdings.
Concentrated holdings allow for an optimized division of tasks and thus more
efficient management. The overlap of the Deutsche Wohnen and LEG
portfolios in West Germany means that the concentration of holdings will
increase in numerous areas and therefore synergies can be created from the
uniform management of the holdings. The operational management of the
combined companyʼs West German portfolio is to be conducted through the
Dusseldorf office.
Increase in revenue and returns as a result of the merger of central functions
for the management of real estate holdings: Synergies can also be created by
establishing joint central customer services and back office functions. As the
joint service volume of the two companies will increase significantly, this
will enable a much more efficient operational management and thus an
increase in productivity. In particular, this includes centralized management
of the holdings, centralized support of the rental management (service points),
billing of utility costs and claims management. Thanks to greater
standardization and the adjustment of operating processes the rent potential
can be better realized and vacancy-related costs reduced.
Scaling of purchasing: The combined company will, according to the
assessment of the Company, also have more bargaining power for optimising
purchasing. This affects, in particular, contracts with energy suppliers,
insurance companies and system providers, and the procurement of IT
hardware and services. The realization of these potentials is dependent on
current contractual conditions, particularly the contract periods. In addition,
there is potential for a reduction of purchasing positions related to utilities
and common charges, which will initially only have a marginal impact on the
FFO (without disposals), but will lead to higher customer satisfaction in the
medium term due to lower costs for utilities and common charges.
Additional privatization potential: Value-creating and sustainable single-unit
privatizations are a key pillar of Deutsche Wohnen’s business model.
Deutsche Wohnen’s Management Board intends to increase the volume of
privatizations from over 1,500 units on average over the last three years for
the combined company to over 3,000 units per year in order to profit more
from the current attractive market environment. On the basis of the current
market environment and the realizable gross margins from sales, the
Management Board expects a significant additional contribution to earnings
(Ergebnisbeitrag) for the FFO (including disposals). In addition,
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 13 -
privatizations will free up considerable financial resources that can be used
for value-creating investments as well as distributions to shareholders.
Assuming that the revenue and cost synergies can be fully realized within four
years, the capitalized value of the expected revenue and cost synergies of EUR
32 million per year is approximately EUR 990 million after taxes. This figure
is based on a capitalization rate of 4%, based on Deutsche Wohnen’s average
weighted capital costs, a growth factor for perpetuities of 1%, an effective tax
rate of 10% and the assumption of an approximately linear development of the
synergies until 2019.
The synergies are offset by expected expenses. Based on information currently
available, the Management Board estimates these expenses to be
approximately EUR 55 million, after taxes. These are comprised in about
equal proportion of transaction costs and integration costs. Based on the
aforementioned estimates by the Management Board regarding the level of
synergies on the one hand and the expenses required to achieve these synergies
on the other hand, the expected net present value of the synergies amounts to
approximately EUR 935 million after taxes. Taking into account the
privatization potential associated with the increase in the residential real estate
portfolio, which according to the estimate of the Management Board can be
realized within two years, the net value of the synergies is about EUR 1,530
million, after taxes.
(3) Maintaining the conservative capital structure and improving the key
financial indicators
The Management Board expects the acquisition in the form of an exchange of
shares to result in a loan-to-value ratio in the combined company of about 42%.
The average financing costs for the combined company, with an average
residual term on financial liabilities of around 10 years, will only be about 2%.
In addition, assuming that termination rights as a consequence of the
completion of the transaction (change of control provisions) are not exercised,
there will not be any significant maturities up to and including the fiscal year
2019. The conservative capital structure is part of the guidance provided by the
Deutsche Wohnen Management Board and should enable continued growth at
low financing costs and support the current A-/A3 rating of Deutsche Wohnen.
As a result, the combined company will enjoy comparatively attractive
financing conditions within the German exchange-listed real estate sector.
The acquisition together with the aforementioned synergies will lead to an
improvement of key financial indicators and a relative strengthening of
Deutsche Wohnen compared to its competitors. The Management Board
anticipates that the merger will enable efficiency advantages as compared to
publicly traded competitors. The Management Board expects that the FFO
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 14 -
(without disposals) per share, following the full realization of the synergies in
the amount of EUR 35 million (before taxes) per year, will improve in the
lower two digit scale. Taking account of the net present value of the synergies,
the merger will have a broadly neutral impact on the adjusted EPRA NAV
(EPRA NAV minus goodwill plus net present value of the revenue and cost
synergies) per share of Deutsche Wohnen. Thus, taking further account of the
return and risk aspects as well as the growth potential of the combined
company, the merger will clearly create value for Deutsche Wohnen
shareholders (see in detail section III.3.(f)(3) below).
(4) Strengthened capital market profile
Finally, the acquisition strengthens the capital market profile of the combined
company. The expected combined market capitalization (free float) of the
Company and LEG (based on the Xetra closing prices on 18 September 2015
and on the basis of a 100% acceptance rate) in the amount of approximately
EUR 13.4 billion will strengthen the significance and the liquidity of the
Company’s shares and thus its attractiveness for investors. In addition, it is
expected that the solid credit rating of the combined group will allow it to
borrow capital at better conditions in perspective. These factors should also
ensure financing with equity capital and/or debt capital at improved conditions
independently from the market cycle and thus further optimize the capital costs
of the combined company. For example, it is possible that the Exchange Offer
will attract new groups of investors. Furthermore, increased liquidity will also,
in Deutsche Wohnen’s view, open up the possibility of being included in the
DAX 30 in the medium term.
2. Description of the Planned Transaction
Based on the proposed resolution of the Management Board, the acquisition of the shares
of LEG by Deutsche Wohnen is planned as follows:
a) Takeover offer in the form of an Exchange Offer
The Management Board of Deutsche Wohnen resolved to issue a voluntary
takeover offer in the form of an Exchange Offer to all shareholders of LEG
pursuant to sections 29, 31, para. 2, sentence 1, alternative 2 of the WpÜG and
published this decision pursuant to section 10, para. 1, 3, sentence 1 of the
WpÜG. The intention is to offer shares in Deutsche Wohnen to the
shareholders of LEG in exchange for their LEG shares at a ratio of 3.30 shares
of Deutsche Wohnen per share representing a notional amount of EUR 1.00 of
LEG‘s share capital.
The Company plans to make the Exchange Offer subject to the standard
conditions for such takeover offers, particularly a minimum acceptance rate of
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 15 -
50% plus one share, a condition related to a material adverse change of LEG’s
business situation and a condition related to the execution of the proposed
capital increase against contributions in kind.
The Management Board expects that a non-prohibition decision
(Nichtuntersagungsentscheidung) will be issued by the German Federal Cartel
Office before publication of the offer document. If this is not the case by the
time the offer document is published, the approval by the German Federal
Cartel Office will become a further closing condition (Vollzugsbedingung) of
the Exchange Offer.
b) Capital increase against contributions in kind with the exclusion of statutory
subscription rights of shareholders for the purpose of the implementation of the
Exchange Offer
Subject to the limitations described in c) (see below), the shares required for
the implementation of the Exchange Offer will be created by way of a capital
increase against contributions in kind with the exclusion of statutory
subscription rights of the shareholders.
The LEG Shares shall be contributed as contributions in kind, and the LEG
shareholders shall receive the newly created shares of the Company in
exchange for their shares. The Exchange Trustees authorized by the
shareholders of LEG to carry out the Exchange Offer shall be the only persons
admitted for the subscription of the New Shares. The subscription rights of the
shareholders of the Company shall be excluded.
Shareholders of LEG who accept the Exchange Offer will transfer their LEG
Shares to the Exchange Trustees. The Exchange Trustees will then contribute
the LEG Shares that they hold in trust to Deutsche Wohnen as contributions in
kind and subscribe the Company´s shares created as part of the planned capital
increase against contributions in kind. Once the New Shares of Deutsche
Wohnen are created, the Exchange Trustees will transfer the shares, in
accordance with the exchange ratio, via the settlement agent to the respective
shareholders of LEG.
Where shareholders of LEG would be entitled to fractional amounts of
Deutsche Wohnen shares according to the exchange ratio, such fractional
amount shall be sold by the Exchange Trustees. The proceeds from the sale of
the fractional amounts will be credited in cash pro rata to the affected
shareholders of LEG.
The maximum amount of this capital increase against contributions in kind is
such that, based on the number of LEG Shares currently outstanding and likely
to be created through the conversion of outstanding convertible bonds before
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 16 -
the end of the additional acceptance period, and the exchange ratio proposed in
the Exchange Offer, a sufficient number of Deutsche Wohnen shares for all the
tendered LEG Shares may be issued and shall amount to approximately 213.1
million shares (subject to the issuance of shares by means of the capital
increase against cash contributions from authorized capital (as set out inc))).
As the Exchange Trustees do not to bear a differential liability
EPRA NAV excluding goodwill ...... 2,943.9 3,303.8 3,303.8
EPRA NAV excluding goodwill
per share ........................................... 50.53 52.12 51.16
Market capitalization. Based on its market capitalization, LEG’s value is
EUR 4,454.7 million.
This calculation is based on the closing price of LEG’s shares on Xetra of the
Frankfurt Stock Exchange (Frankfurter Wertpapierbörse) on the last trading
day prior to the publication pursuant to section 10, para. 1, 3, sentence 1 of
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 29 -
the WpÜG in the amount of EUR 70.27 multiplied by 63.4 million. 63.4
million is the total of the number of shares (58.3 million) outstanding as of
this reference date (Stichtag) and the number of shares that would result if
there were a conversion of all outstanding convertible bonds at the conversion
price as of 18 September 2015 (5.1 million).
Based on the volume-weighted average price (VWAP) during the last 3
months up to the last trading day prior to the publication pursuant to
section 10, para. 1, 3 sentence 1 of the WpÜG of EUR 66.36 per share
(according to Bloomberg), the market capitalization would amount to
EUR 4,206.7 million.
f) Appropriateness of the exchange ratio on the basis of the valuation of Deutsche
Wohnen and LEG
(1) On the basis of the valuations of Deutsche Wohnen and LEG presented in d)
and e), the value ratio of the two companies is as follows, whereby the
calculations are based on the assumption of the acquisition of 100% of LEG:
EPRA NAV including goodwill. Based on the valuation of the two
companies on the basis of their respective EPRA NAVs, including
goodwill, as of 30 June 2015, the value ratio (Wertverhältnis) of
Deutsche Wohnen to LEG is 2.30 to 1, compared to an implicit
value ratio on the basis of the exchange ratio of 1.75 to 1 (calculated
on the basis of the current number of outstanding Deutsche Wohnen
and LEG shares). Accordingly, Deutsche Wohnen will receive, on
the basis of the respective EPRA NAVs as of 30 June 2015, EUR
15.45 per share of Deutsche Wohnen issued, compared to an EPRA
NAV for Deutsche Wohnen of EUR 20.27. Correspondingly, the
implementation of the transaction, before taking into account
synergies and based on the total number of shares used to calculate
the EPRA NAV (529.6 million, following completion of the
transaction), would lead to a dilution of the EPRA NAV of EUR
1.75 (or 8.6%) per share.
EPRA NAV excluding goodwill. Based on the valuation of the two
companies on the basis of their respective EPRA NAVs, excluding
goodwill, as of 30 June 2015, the value ratio (Wertverhältnis) of
Deutsche Wohnen to LEG is 2.14 to 1, compared to an implicit
value ratio on the basis of the exchange ratio of 1.75 to 1 (calculated
on the basis of the current number of outstanding Deutsche Wohnen
and LEG shares). Accordingly, Deutsche Wohnen will receive, on
the basis of the respective EPRA NAVs as of 30 June 2015, EUR
15.31 per share of Deutsche Wohnen issued, compared to an EPRA
NAV for Deutsche Wohnen of EUR 18.69. Correspondingly, the
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 30 -
implementation of the transaction, before taking into account
synergies and based on the total number of shares used to calculate
the EPRA NAV (529.6 million, following completion of the
transaction) would lead to a dilution of the EPRA NAV of EUR
1.23 (or 6.6%) per share.
EPRA NAV (diluted) and pro forma EPRA NAV (diluted), both
including goodwill. For the comparison on the basis of the diluted
EPRA NAV, the pro forma EPRA NAV (diluted) was used for LEG,
because, as a result of the offer, an adjustment of the conversion
price in favour of the holder of the LEG convertible bond and a
corresponding increase in the maximum number of LEG Shares
submitted as part of the offer is expected. Based on the valuation of
both companies on the basis of the EPRA NAV (diluted) for
Deutsche Wohnen and pro forma EPRA NAV (diluted) for LEG as
of 30 June 2015, each including goodwill, the value ratio
(Wertverhältnis) of Deutsche Wohnen to LEG is 2.30 to 1,
compared to an implicit value ratio on the basis of the exchange
ratio of 1.74 to 1 (calculated on the basis of the number of Deutsche
Wohnen and LEG shares underlying the relevant EPRA NAV).
Accordingly, Deutsche Wohnen will receive, on the basis of the pro
forma EPRA NAV (diluted) as of 30 June 2015, EUR 15.62 per
share of Deutsche Wohnen issued, compared to an EPRA NAV
(diluted) for Deutsche Wohnen of EUR 20.65. Correspondingly, the
implementation of the transaction, before taking into account
synergies and based on the total number of shares used to calculate
the relevant EPRA NAV (583.2 million, following completion of
the transaction) would lead to a dilution of the EPRA NAV of EUR
1.84 (or 8.9 %) per share.
EPRA NAV (diluted) and pro forma EPRA NAV (diluted), both
excluding goodwill. Based on the valuation of both companies on
the basis of the EPRA NAV (diluted) for Deutsche Wohnen and pro
forma EPRA NAV (diluted) for LEG as of 30 June 2015, each
excluding goodwill, the value ratio (Wertverhältnis) of Deutsche
Wohnen to LEG is 2.15 to 1, compared to an implicit value ratio on
the basis of the exchange ratio of 1.74 to 1 (calculated on the basis
of the number of Deutsche Wohnen and LEG shares underlying the
relevant EPRA NAV). Accordingly, Deutsche Wohnen will receive,
on the basis of the pro forma EPRA NAV (diluted) as of 30 June
2015, EUR 15.50 per share of Deutsche Wohnen issued, compared
to an EPRA NAV (diluted) for Deutsche Wohnen of EUR 19.21.
Correspondingly, the implementation of the transaction, before
taking into account synergies and based on the total number of
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 31 -
shares used to calculate the relevant EPRA NAV (583.2 million,
following completion of the transaction) would lead to a dilution of
the EPRA NAV of EUR 1.35 (or 7.0 %) per share.
Market capitalization on the basis of closing prices. Based on the
valuation of the two companies on the basis of the closing price on
Xetra of the Frankfurt Stock Exchange (Frankfurter
Wertpapierbörse) on the last trading day prior to the publication
pursuant to section 10, para. 1, 3 sentence 1 of the WpÜG the value
ratio (Wertverhältnis) of Deutsche Wohnen to LEG is 2.00 to 1. For
purposes of the calculation of the market capitalization, the diluted
number of shares of both companies was taken as a basis (for LEG
without consideration of an adjustment of the conversion price as a
result of the change of control), because it reflects the approach and
level of knowledge of market participants at the time of the
valuation (18 September 2015). All bonds were at this time in the
money, so that a conversion was expected; however, the market
could not yet have expected a possible change of control. Calculated
on the basis of the closing prices on Xetra of the Frankfurt Stock
Exchange (Frankfurter Wertpapierbörse) on the last trading day
prior to the publication pursuant to section 10, para. 1, 3 of the
WpÜG, Deutsche Wohnen will receive EUR 20.90 per share of
Deutsche Wohnen issued, compared to the closing price of Deutsche
Wohnen of EUR 24.05. Correspondingly, the implementation of the
transaction, before taking into account of synergies and based on the
total maximum number of outstanding shares of Deutsche Wohnen
following completion of the transaction (583.2 million) would lead
to a mathematical dilution of the market price (Kurswert) of
Deutsche Wohnen shares of EUR 1.15 (or 4.8%) per share.
Market capitalization on the basis of weighted average prices.
Based on the valuation of the two companies on the basis of the
volume-weighted average price (VWAP) of the shares during the
last 3 months up to the last trading day prior to the publication
pursuant to section 10, para. 1, 3 sentence 1 of the WpÜG, the value
ratio (Wertverhältnis) of Deutsche Wohnen to LEG is 2.01 to 1. For
purposes of the calculation of the market capitalization, the diluted
number of shares of both companies was taken as a basis (for LEG
without consideration of an adjustment of the conversion price as a
result of the change of control), because it reflects the approach and
level of knowledge of market participants at the time of the
valuation (18 September 2015). All bonds were at this time in the
money, so that a conversion was expected; however, the market
could not yet have expected a possible change of control. Calculated
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 32 -
on the basis of the volume-weighted average price (VWAP) of the
shares during the last 3 months up to the last trading day prior to the
publication pursuant to section 10, para. 1, 3 of the WpÜG,
Deutsche Wohnen will receive EUR 19.74 per share of Deutsche
Wohnen issued, compared to the average price of Deutsche Wohnen
of EUR 22.84. Correspondingly, the implementation of the
transaction, before taking into account synergies and based on the
total maximum number of outstanding shares of Deutsche Wohnen
following completion of the transaction (583.2 million) would lead
to a mathematical dilution of the average price (Durchschnittswert)
of Deutsche Wohnen shares of EUR 1.13 (or 5.0%) per share.
On the basis of the parameters analyzed here, the dilution was calculated as follows:
EPRA
NAV
EPRA
NAV
(excluding
goodwill)
EPRA
diluted
against
pro forma
EPRA
diluted
EPRA
diluted
against
pro forma
EPRA
diluted
(excluding
goodwill)
Market
capitalization
(closing
price)
Market
capitalization
(3-month
VWAP)
For Deutsche Wohnen
per share in EUR 20.27 18.69 20.65 19.21 24.05 22.84
For LEG per share in
EUR 50.98 50.53 51.56 51.16 70.27 66.36
For LEG per Deutsche
Wohnen share offered
for exchange in EUR1 15.45 15.31 15.62 15.50 20.90 19.74
Difference per
Deutsche Wohnen
share to be offered in
EUR2 4.83 3.37 5.03 3.71 3.15 3.10
Total number of
Deutsche Wohnen
shares to be issued3
192.3
mn
192.3
mn
213.1
mn
213.1
mn
213.1
mn
213.1
mn
Total of the difference
for all Deutsche
Wohnen shares to be
issued in EUR4
927.9
mn
648.8
mn
1,072.0
mn
789.7
mn
671.0
mn
661.4
mn
Total number of
Deutsche Wohnen
529.6
mn
529.6
mn
583.2
mn
583.2
mn
583.2
mn
583.2
mn
1 Respective value per LEG share, multiplied by the exchange ratio (1 to 3.30). 2 Calculated on the basis of the difference of the respective value for Deutsche Wohnen per Deutsche Wohnen share and the value
for LEG per Deutsche Wohnen share to be issued (line 1 minus line 3 of this table). 3 Calculated for undiluted values on the basis of the outstanding number of shares as of the relevant date and for diluted values and
market capitalization on the assumption of the full conversion of outstanding convertible bonds (in the case of LEG, on the basis
of the adjusted conversion price as a result of the change of control), each multiplied by the exchange ratio. 4 Difference per Deutsche Wohnen share to be issued (line 4 of this table) multiplied by the total number of Deutsche Wohnen
shares to be issued (line 5 of this table).
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 33 -
EPRA
NAV
EPRA
NAV
(excluding
goodwill)
EPRA
diluted
against
pro forma
EPRA
diluted
EPRA
diluted
against
pro forma
EPRA
diluted
(excluding
goodwill)
Market
capitalization
(closing
price)
Market
capitalization
(3-month
VWAP)
shares after the
transaction5
Dilution per Deutsche
Wohnen share after the
transaction in EUR6 (1.75) (1.23) (1.84) (1.35) (1.15) (1.13)
Dilution per Deutsche
Wohnen share after the
transaction in %7 (8.6%) (6.6%) (8.9%) (7.0%) (4.8%) (5.0%)
(2) The dilution outlined above on the basis of various key performance
indicators is, however, offset by an increase in value resulting from the
synergies related to the merger. It is recognized that such synergies must be
taken into consideration when determining the appropriateness of the
exchange ratio in connection with a capital increase against contributions in
kind. The synergies result – as presented in detail under III.1.c) – primarily
from the reduction of administrative costs (personell and material costs),
particularly as a result of the combination of holding functions, the merger of
the West German operating platforms, the increase in revenue and returns as
a result of active portfolio management, the standardization of the corporate
structures and the scaling of purchasing.
The capitalized net present value of the revenue and cost synergies, after
deduction of the costs required to achieve them is approximately EUR 935
million (see section III.1.c) above).
Taking account of the synergies, the individual dilutions/increases in value
are as follows:
5 Sum of the total number of Deutsche Wohnen shares to be issued (line 5 of this table) and, (for undiluted values) the undiluted
number of the number of Deutsche Wohnen shares currently outstanding, or (for diluted values and market capitalization) the number of outstanding Deutsche Wohnen shares assuming the full conversion of outstanding convertible bonds.
6 Total of the difference for all Deutsche Wohnen shares issued (line 6 of this table) divided by the total number of Deutsche
Wohnen shares after the transaction (line 7 of this table). 7 Dilution per Deutsche Wohnen share after the transaction in EUR (line 8 of this table) divided by the respective value for
Deutsche Wohnen per share (line 1 of this table).
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 34 -
EPRA
NAV
EPRA
NAV
(excluding
goodwill)
EPRA
diluted
against pro
forma
EPRA
diluted
EPRA
diluted
against pro
forma
EPRA
diluted
(excluding
goodwill)
Market
capitalizati
on (closing
price)
Market
capitalizati
on (3-
month
VWAP)
Dilution (gross) per
share in EUR (1.75) (1.23) (1.84) (1.35) (1.15) (1.13)
Dilution (gross) per
share in % (8.6%) (6.6%) (8.9%) (7.0%) (4.8%) (5.0%)
Synergies per share in
EUR 1.77 1.77 1.60 1.60 1.60 1.60
Value creation/dilution
after synergies per share
in EUR 0.01 0.54 (0.23) 0.25 0.45 0.47
Value creation/dilution
after synergies per share
in % 0.1% 2.9% (1.1%) 1.3% 1.9% 2.1%
The above shows that the transaction, with the exception of the valuation on
the basis of diluted EPRA NAVs, leads to an increase in value, even without
taking account of the additional privatization potential. The dilution for
valuation on the basis of the diluted EPRA NAVs is approximately 1% and is
therefore very low. If one considers the synergies of the merger resulting from
the additional privatization potential with an additional profit contribution of
approximately EUR 20 million before taxes per year, the transaction creates
value under all valuation methods in the high single digit percentage range.
(3) The appropriateness of the relative market valuation of the two companies is
also proven by a comparison of their Funds from Operations (FFO) profiles.
Funds from Operations (FFO) is a relevant liquidity indicator for listed real
estate companies, which is derived from the profit and loss statement. Based
on the profit or loss for a period, adjustments are made for depreciations and
amortizations, special items, non-liquidity-related financing expenses or
financing income and non-liquidity-related tax expenses or tax income. FFO
(including disposals) is adjusted for results from sales in order to determine
the FFO (without disposals).
The following illustration is based on the estimates communicated by LEG to
the market in its interim report as of 30 June 2015 of its FFOs for fiscal years
2015 and 2016. Given that LEG (as well as Deutsche Wohnen) does not
communicate any estimates of its future FFO (including sales) to the market,
the comparison is based on the key figure FFO (excluding sales).
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 35 -
Deutsche Wohnen LEG
Outlook for 2015 FFO (without
disposals) in EUR mn ............... 285-290 200-204
Return on EPRA NAV
(undiluted) as of 30 June 2015 .. 4.2% 6.7-6.9%
Deutsche Wohnen LEG
Outlook for 2016 FFO (without
disposals) in EUR mn ............... 330 233-238
Return on EPRA NAV
(undiluted) as of 30 June 2015 .. 4.8% 7.8-8.0%
As a result of the expected medium-term realization of revenue and cost
synergies in the amount of EUR 32 million per year after taxes, the FFO
profile (without disposals) profile will improve, despite the premium offered
to LEG shareholders:
Deutsche
Wohnen LEG
Combined
company
FFO in EUR mn (2015) ............. 285-290 200-204 485-494
per share in EUR (undiluted) .. 0.98 4.00-4.09 1.12-1.13
Value creation (undiluted) ...... 14.8-15.7%
per share (diluted) .................. 0.89 3.68-3.75 1.02-1.03
8 The calculation of the undiluted FFO per share is based on the number of shares of both companies currently outstanding and the
calculation of the diluted FFO per share is based on the number resulting from the assumption of the full conversion of
outstanding convertible bonds (for the combined company with respect to LEG, on the basis of the adjusted conversion price as a result of the change of control). No adjustment of the respective FFOs with respect to the interest effect (Zinseffekt) from the
conversion of the bonds has been carried out because of a lack of relevance and because of a lack of the relevant information for
LEG. 9 The calculation of the undiluted FFO per share is based on the number of shares of both companies currently outstanding and the
calculation of the diluted FFO per share is based on the number resulting from the assumption of the full conversion of
outstanding convertible bonds (for the combined company with respect to LEG, on the basis of the adjusted conversion price as a
result of the change of control). No adjustment of the respective FFOs with respect to the interest effect (Zinseffekt) from the conversion of the bonds has been carried out because of a lack of relevance and because of a lack of the relevant information for
LEG.
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 36 -
Deutsche
Wohnen LEG
Combined
company
Value creation (diluted) ......... 14.3-15.3%
The above comparison shows that, based on a comparison of the FFO
(without disposals), the planned merger creates value from the perspective of
Deutsche Wohnen shareholders in the lower two digit percentage range.
However, with respect to the above comparison it should be noted that long-
term single-unit privatizations with a corresponding contribution to the FFO
(including disposals) are a significant pillar of Deutsche Wohnen’s business
model, while a corresponding privatization program does not, to the
knowledge of the Management Board, exist to an appreciable extent at LEG.
Correspondingly, the Management Board assumes that while a comparison of
the companies on the basis of the FFO (including disposals) would be value
creating, it would not be so to the same extent as a comparison on the basis of
the FFO (without disposals).
IV.
Pursuant to section 186, para. 4 sentence 2 of the AktG, the Management Board hereby presents to the
General Meeting the following report on the justification for the intended exclusion of the
shareholdersʼ subscription rights as part of the aforementioned proposed resolution for a capital
increase against contributions in kind. In this respect, the statements made in section III. regarding the
entire transaction also apply to this report and are an integral component of it.
A proposal is made to the General Meeting to increase the share capital of the Company from
EUR 336,426,511.00 registered with the commercial register (Handelsregister) by up to
EUR 213,127,385.00 to up to EUR 549,553,896.00 against contributions in kind.
In general, shareholders have a legal subscription right when there is a capital increase (section 186,
para. 1, sentence 1 of the AktG). However, the Supervisory Board and the Management Board
propose to the General Meeting to exclude the subscription right of shareholders pursuant to
section 186, para. 3 of the AktG in the resolution on the increase of the share capital.
The purpose of the proposed capital increase with the exclusion of the shareholdersʼ subscription
rights is to enable the Company to acquire an interest in LEG by increasing the Company’s share
capital through the issuance of shares in the Company against the contribution of shares of LEG as
contributions in kind. The shares issued in the course of the proposed capital increase of the Company
shall be issued in connection with the Exchange Offer made to all shareholders of LEG pursuant to
sections 29, 31 para. 2, sentence 1, alternative 2 of the WpÜG to acquire all LEG Shares held by the
shareholders of LEG at a ratio of 1 to 3.30, i.e. LEG shareholders receive 3.30 shares in Deutsche
Wohnen for 1 LEG share.
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 37 -
The purpose of the proposed exclusion of the shareholders’ subscription rights is in the companyʼs
interest (Gesellschaftsinteresse) of Deutsche Wohnen. The exclusion of the shareholders’ subscription
rights is suitable and necessary for the furtherance of the interests of Deutsche Wohnen and is
proportional to the disadvantages of the shareholders of Deutsche Wohnen. The exchange ratio
between the LEG Shares and the shares of Deutsche Wohnen of 1 to 3.30 is not unreasonably to the
detriment of the shareholders of Deutsche Wohnen.
1. The interest of Deutsche Wohnen in the exclusion of the shareholders’ subscription
rights
The purpose of the proposed exclusion of the shareholders’ subscription rights –
acquiring an interest in LEG via a capital increase against contributions in kind and
the Exchange Offer to the shareholders of LEG – is in the interest of the Company.
This criterion is satisfied if the corporate bodies involved in the decision making
justifiably take the view that the capital increase against contributions in kind is in the
best interest of the Company and thus of all shareholders. According to the synergies
described above under III.1.c), the Company is especially interested in concentrating
on a growth market through the merger with LEG and achieving the described
synergy potential:
The merger with LEG therefore offers annual revenue and cost synergies which the
Management Board deems feasible given full integration within four years after
completion of the transaction and which it figures to amount to approximately EUR
35 million before taxes. The capitalized net present value of the synergies amounts to
approximately EUR 935 million, taking into account the costs required to realize the
synergies (see above under III.1.c)).
Furthermore, the acquisition of LEG strengthens the capital market profile of the
combined company. The combined market capitalization of the free float makes
Deutsche Wohnen among the largest real estate companies in Europe and strengthens
the liquidity of the stock. In addition, it will be easier to raise equity and debt capital
because the combined company’s position in the competition for investors would be
improved.
According to expectations of the Management Board, with an average remaining term
of the financial liabilities of around 10 years and financing costs of approximately 2%
the combined group has good financial indicators as compared to its competitors as
well as a conservative capital structure with a leverage ratio (loan-to-value) of around
42%. In comparison to its main competitors, it has a very efficient cost structure and,
measured in terms of the number of residential units, it would be the second largest
listed residential real estate company in Germany, with the completion of the
transaction reducing the gap to the largest company considerably.
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 38 -
2. Suitability and necessity of the exclusion of the shareholders’ subscription rights
The Management Board considers the exclusion of the shareholders’ subscription
rights to be suitable and necessary to achieve the underlying purpose in the interest of
the Company.
The exclusion of the shareholders’ subscription rights is suitable to achieve the
purpose pursued in the interest of the Company because the Exchange Offer to the
shareholders of LEG, i.e. the offer to exchange all of their LEG Shares for New
Shares of the Company from the proposed capital increase against contributions in
kind requires an exclusion of the Company’s shareholders’ subscription rights.
The exclusion of the shareholders’ subscription rights is also necessary to achieve this
purpose. In its deliberations the Management Board has considered alternatives for
structuring the proposed transaction, but it has rejected them as impractical or less
suitable:
Due to the magnitude of the financing required for the acquisition of LEG, a debt
financing of the acquisition is not feasible. As of 30 June 2015 Deutsche Wohnen’s
loan-to-value ratio amounts to approximately 40.9% (reported net financial debt of
EUR 4,455 million in relation to properties held as investment properties, non-current
assets held for sale, as well as land and buildings held for sale, amounting to a
reported value of EUR 10,901.7 million). As of 30 June 2015, LEG had a loan-to-
value ratio of approximately 49.4% (reported net financial debt of EUR 3,022.7
million in relation to properties held as investment properties, assets held for sale and
prepayments on properties held as investment properties amounting to a reported total
value of EUR 6,120.6 million). If the acquisition of all shares in LEG including the
proposed premium were entirely debt financed, then the combined company would
have a loan-to-value ratio of around 72.2%. This leverage ratio would lie significantly
above the industry standard and would be contrary to the expectations of investors
concerning the management of Deutsche Wohnen, which has been known in the past
to clearly aim for a conservative capital structure. In addition, a negative impact on
Deutsche Wohnen’s credit rating could be expected given such an increase in the
leverage ratio, and in turn would significantly increase the refinancing risk in relation
to existing financial liabilities and, at least in the medium term, the financing costs of
the Company.
This loan-to-value ratio would be significantly above the industry standard and thus
excludes the borrowing of funds in the required amount – in any case, due to the
financing costs, a fully debt-financed acquisition would be associated with high
economic risks for the Company.
A capital increase against cash contributions without an exclusion of the shareholders’
subscription rights, in order to pursue the contemplated transaction using cash and
allowing the shareholders of the Company to subscribe for the shares issued in the
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 39 -
context of the transaction, is less suitable than an acquisition by way of an Exchange
Offer for several reasons. First, such a capital increase against cash contributions
would have to finance the entire takeover offer even in case of an acceptance rate of
100%. Neither the extent to which shareholders subscribe for new shares nor the
subscription price (Bezugspreis) in the course of such capital increase – at least with
such a volume – can be predicted with any certainty and depends, in particular, on the
market conditions at the time of the implementation of the capital increase. In order to
obtain reasonable assurance as to the financial viability of the offer, a rights issue
would have to precede the beginning of the acceptance period of the Exchange Offer.
This in turn means that the capital increase would have to be implemented before the
actual acceptance rate and the success of the takeover offer could be determined.
Consequently, following the capital increase against cash contributions, the Company
would be significantly overcapitalized if the offer were not implemented, for example,
due to a competing offer or non-occurrence of offer conditions, or were only partially
implemented, for example due to an acceptance rate lower than was assumed when
calculating the size of the capital increase. Finally, the implementation of such a
measure would, for lack of sufficient authorized capital, require a direct resolution of
the General Meeting; therefore, implementation of the measure before the beginning
of the acceptance period would be associated with significant timing risks.
In connection with the Exchange Offer, a combined equity- and debt-financed
acquisition of the shares in LEG is also less suitable than a capital increase against
contributions in kind with the exclusion of the shareholders’ subscription rights, even
though a partial debt financing could in principle complement a capital increase
against cash contributions without an exclusion of the shareholders’ subscription
rights and lead to a reduction of the market risk. However, taking into account the
current debt financing of LEG’s portfolio, the transaction would lead to a significant
increase of the loan-to-value ratio of the combined company. Moreover, this would
not change the fact that the Company would be overcapitalized if the Exchange Offer
were either not implemented at all or not fully implemented.
Finally, an acquisition by way of a merger by absorption (Verschmelzung durch
Aufnahme) (section 2, no. 1 of the German Transformation Act (“UmwG”)) is also
less suitable. Firstly, the subscription rights of the Company’s shareholders would be
excluded in the same way as in the case of a capital increase against contributions in
kind, because the shares issued in the course of the merger-linked capital increase
(Verschmelzung mit Kapitalerhöhung) (section 69 UmwG) mandatorily would have to
be awarded to the shareholders of LEG. Secondly, in contrast to the contemplated
acquisition of a maximum of 94.9% of the shares in LEG in case of a capital increase
against contributions in kind excluding the shareholders’ subscription right, the
merger would lead to the acquisition of all shares in LEG and thus trigger a German
real estate transfer tax with regard to the real estate of LEG located in Germany.
Annex 1 – Report of the Management Board purs. to sec. 186, para. 4, sent. 2 AktG
- 40 -
3. Appropriateness of the exclusion of subscription rights and appropriateness of the
exchange ratio
The exclusion of the subscription rights is also appropriate in order to achieve the goal
to acquire an interest in LEG, which is in the companyʼs interest
(Gesellschaftsinteresse), by means of a capital increase against contributions in kind
and an Exchange Offer to the shareholders of LEG. Moreover, the exchange ratio
between the LEG Shares and the shares of Deutsche Wohnen is not unreasonably low
at the expense of the shareholders of Deutsche Wohnen.
In the context of the capital increase against contributions in kind, the exclusion of
subscription rights will inevitably cause a dilution of membership rights
(Mitgliedschaftsrechte) of the shareholders of Deutsche Wohnen. The dilution of the
existing participations in Deutsche Wohnen associated with the exclusion of
subscription rights is, however, proportionate to the objective pursued in the interest
of the Company and therefore justified.
In addition, the exclusion of subscription rights in the context of the capital increase
against contributions in kind will lead to a dilution of the intrinsic value of the shares
of the Deutsche Wohnen shareholders. However, this dilution is, under nearly all of
the methods for valuing the shares considered, almost completely balanced out by
revenue and cost synergies that can be realized as a result of the transaction. This is
because, with the exception of the valuation on the basis of the diluted EPRA NAVs,
the transaction leads to a creation of value from the perspective of Deutsche Wohnen.
The dilution for valuation on the basis of the diluted EPRA NAVs is approximately
1% and is therefore very low (see section III.3.f) above). Considering the sustainable
revenue potential associated with the additional volume of privatizations, the
transaction creates value under all valuation methods in the high single digit
percentage range. This valuation is supported by a comparison of the FFO profiles of
the companies.
It is recognized that synergies must be taken into consideration when assessing the
appropriateness of the exchange ratio in connection with a capital increase against
contributions in kind. It is also recognized that an appropriate premium may be
granted in favor of the new shareholders in order to help the Exchange Offer succeed.
The Management Board therefore considers the exchange ratio underlying the capital
increase against contributions in kind as appropriate from the perspective of Deutsche
Wohnen.
* * *
Frankfurt am Main, Germany, September 2015
Deutsche Wohnen
The Management
* * *
Annex A
To the Report of the Management Board pursuant to section 186, para. 4, sentence 2 of the
German Stock Corporation Act (“AktG”) on agenda item 1 for the Extraordinary General
Meeting to be held on Wednesday, 28 October 2015 regarding the reason for the exclusion of
shareholders’ subscription rights
Annex B
To the Report of the Management Board pursuant to section 186, para. 4, sentence 2 of the
German Stock Corporation Act (“AktG”) on agenda item 1 for the Extraordinary General
Meeting to be held on Wednesday, 28 October 2015 regarding the reason for the exclusion of
shareholders’ subscription rights
Deutsche Wohnen AG Valuation Report ▪ CBRE
V-1 of V-50
Annex C
To the Report of the Management Board pursuant to section 186, para. 4, sentence 2 of the
German Stock Corporation Act (“AktG”) on agenda item 1 for the Extraordinary General Mee-
ting to be held on Wednesday, 28 October 2015 regarding the reason for the exclusion of share-
holders’ subscription rights
VALUATION REPORT FOR THE DETERMINATION OF FAIR VALUE
in the form of a condensed valuation report (“Valuation Report”) of the determination of Fair Value
carried out by CBRE in accordance with the International Financial Reporting Standards (IFRS), the
International Standards for the Valuation of Real Estate for Investment Purposes (“International Valuation
Standards”) and the RICS Valuation – Professional Standards, (January 2014) (Red Book), published by the
Royal Institution of Chartered Surveyors, for the purpose of the integration into the corporate
management report for the extraordinary general meeting in Q3 or Q4 2015 by Deutsche Wohnen AG
(the “Company”). The Report covers the Residential Portfolio of 2,277 investment assets, comprised of
141,858 residential units, 2,447 commercial units and 34,015 miscellaneous rented units (garages, parking
spaces, antennas) and Land consisting of 23 undeveloped sites with an area of 758,532 sq m and the
Nursing and Assisted Living Portfolio, comprised of 17 assets.
Date of Valuation: Residential Portfolio: June 30, 2015
Nursing and Assisted Living Portfolio: June 30, 2014
Date of Valuation Report: September 18, 2015
Valuer:
CBRE GmbH
Bockenheimer Landstraße 24
60323 Frankfurt
Germany
Addressee: Deutsche Wohnen AG
Pfaffenwiese 300
65929 Frankfurt am Main
Germany
CBRE is a "Gesellschaft mit beschränkter Haftung" (limited liability company), registered under commercial law in Germany under
the company registration number 13347. The German company CBRE GmbH was established on April 3, 1973 and has its registered
office at Bockenheimer Landstraße 24, 60323 Frankfurt/Main, Germany.
CBRE is not a company that is regulated by any regulatory authority; however in its valuation department it employs amongst others
a publicly appointed and sworn-in valuer (Öffentlich bestellter und vereidigter Sachverständiger), members of the Royal Institution
of Chartered Surveyors (RICS), and valuers certified by HypZert GmbH.
Deutsche Wohnen AG Valuation Report ▪ CBRE
V-2 of V-50
SUMMARY OF THE VALUATION CONCLUSIONS
Upon the assumption that, after reasonable inquiry of the Company, there are no onerous restrictions or
unusual outgoings of which we have no knowledge and based on the specific comments and
assumptions outlined in this Valuation Report, we are of the opinion that the aggregate of the individual
Fair Values (net) of the freehold / ground-leasehold interests in the assets, rounded at asset level, are:
the Residential Portfolio
as at June 30, 2015:
the Nursing and Assisted Living Portfolio
as at June 30, 2014:
10,282,752,000 EUR
(Ten billion, two hundred and eighty-two million,
seven hundred and fifty-two thousand Euros)
net of purchasers’ costs and VAT
of which the value of the Land is 19,191,500 EUR.
143,820,000 EUR
(One hundred and forty-three million, eight hun-
dred and twenty thousand Euros)
net of purchasers’ costs and VAT
The assessment of Fair Values was carried out at asset level. The aggregate of the individual Fair Values
presented here takes into account the marketing period and the transaction costs of the individual assets
and does not reflect any discounts or premiums on the sale of the whole portfolio or if parts of the
portfolio were to be marketed simultaneously or in lots.
CBRE has not been engaged to update the CBRE valuations for the purpose of the Valuation Report, has
no obligation to do so and has not updated the CBRE valuations after these valuation dates. CBRE is
currently in the process of updating the Fair Value of the Nursing and Assisted Living Portfolio for internal
purposes with the date of valuation being August 31, 2015. This valuation will not be completed prior to
the date of the Valuation Report.
For a detailed breakdown of values between freehold-equivalent and leasehold assets please refer to Part
5 “Valuation Conclusions”.
One asset in the Residential Portfolio has a negative Fair Value as shown below:
This negative Fair Value is reflected in the total aggregate figure given above.
For the avoidance of doubt, we have not included assets which are held by the Company for their own
1.6 Date of Valuation ............................................................................................................................................. 7
1.9 Concept of Value ............................................................................................................................................. 7
1.11 Sources of Information .................................................................................................................................. 9
1.12 Place of Performance and Jurisdiction ..................................................................................................... 9
1.13 Assignment of Rights ..................................................................................................................................... 9
1.14 Declaration of Independence ...................................................................................................................... 9
2.3 Total Lettable Area by Type of Use .......................................................................................................... 11
2.4 Current Gross Rental Income (annualised) by Type of Use ............................................................. 11
2.5 Residential Units by Regional Portfolios ................................................................................................ 12
2.5.1 Lettable Area by Regional Portfolios ............................................................................................................... 14
2.5.2 Vacancy Rate by Regional Portfolios ............................................................................................................... 14
2.5.3 Current Gross Rental Income (annualised) by Regional Portfolios ....................................................... 15
2.5.4 Fair Value by Regional Portfolios ...................................................................................................................... 15
2.5.5 Fair Value (EUR per sq m) by Regional Portfolios ....................................................................................... 16
2.6 Fair Value of Residential Portfolio ............................................................................................................ 16
2.7 Key Valuation Data ........................................................................................................................................ 18
3 NURSING AND ASSISTED LIVING PORTFOLIO ......................................................................... 19
3.4 Asset Type ....................................................................................................................................................... 20
3.5 Current Gross Rental Income (annualised) by Federal State ......................................................... 20
3.6 Fair Value by Federal State ......................................................................................................................... 21
3.7 Fair Value of Nursing and Assisted Living Portfolio ......................................................................... 22
3.8 Key Valuation Data ....................................................................................................................................... 22
4 EXPLANATION OF VALUATION .............................................................................................. 24