Aareal Bank: Financial investors want to take over money house

Frankfurt The financial investors Centerbridge and Advent are serious: They want to make the shareholders of Aareal Bank an offer of 29 euros per share, as the Wiesbaden real estate financier and the financial investors announced on Tuesday. Aareal Bank’s management supports the offer, which the institute would value at around 1.74 billion euros on the stock exchange.

For Aareal Bank, this means a clear change in strategy: Instead of a stable dividend, the focus should be on growth in the future.

In the discussions with the investors, the bank’s management came to the conclusion that, together with the financial investors, they could “even better exploit” the growth potential of the bank in all segments. “The announced offer is therefore in the best interests of our company and its stakeholders,” said CEO Jochen Klösges.

The move by the group of investors is the largest takeover bid that has appeared in the German banking scene in recent years. After a takeover, investors could seek delisting, i.e. take the share off the stock exchange.

An investor agreement to prepare the offer has already been concluded, the offer documents are expected to be published in mid-December. The transaction should close in the coming year – if enough shareholders join in.

Because the takeover offer will only come about if at least 70 percent of the shareholders accept it. The price of 29 euros per share corresponds to a premium of around 23 percent on the closing price on October 6, the day before the takeover talks became known. In relation to the volume-weighted three-month average rate, the premium is even 35 percent, according to the bank.

In financial circles it is said that the premium is twelve percentage points above the average of public takeover offers in recent years. Still, the deal is not a sure-fire success. Aareal Bank has long been the target of activist investors, many of whom had relied on a spin-off from the software subsidiary Aareon. Most recently, the financial investor Daniel Kretinsky got on board. He alone now holds 7.8 percent of the shares.

One of the activists, the Teleios hedge fund, which has a five percent stake in the institute, made a critical statement on Tuesday. “This clandestine offer process is another attempt by Aareal Bank’s Supervisory Board to make things easy for itself to the detriment of shareholders,” wrote Adam Epstein, co-founder of Teleios Capital Partners, in an email to Bloomberg News. “Aareal is not a Christmas present that the Supervisory Board can give away.”

The activist investor Petrus Advisers, who holds five percent of the shares and ten percent of derivatives and sees itself as the largest single shareholder, has not yet commented on the offer. However, the takeover plans were well received by many Aareal Bank investors. The shares of the Wiesbaden real estate financier were listed in the afternoon by 3.9 percent higher at 29.16 euros.

Two more investors on board

However, should the takeover fail, the share price should fall significantly again. An investment banker then considers 24 euros or 25 euros to be realistic.

The European Central Bank’s (ECB) ban on dividends, but also the potential that many investors have discovered in the software subsidiary Aareon, have significantly changed the bank’s shareholder base in recent months. Ordinary shareholders, for whom Aareal Bank was primarily a dividend stock, reduced their shares, activists got on board and repeatedly pointed out weaknesses to the institute and called for Aareon to be spun off.

According to insiders, the buyer consortium includes, in addition to Centerbridge and Advent, two other investors, each with around 40 percent, who together make up around 20 percent: on the one hand, it is the investment arm of the US bank Goldman Sachs, and on the other hand, the asset manager LGT from Lichtenstein.

The background to this construction: private investment companies shy away from taking a majority, i.e. more than 50 percent of the shares, in German banks, as otherwise they themselves need a banking license and are liable to the deposit insurance.

Since the investors finance the deal entirely with equity, a domination agreement is unnecessary for them, also in terms of financing, and is not sought. In other, debt-financed transactions, however, a domination agreement is important, as it secures access to the target company’s cash flows and thus also the interest payments.

A successful takeover would bring more peace to the real estate financier. Ben Langworthy, Senior Managing Director at Centerbridge, said that with a stable shareholder base, Aareal Bank could better focus on its longer-term goals. In financial circles it was said that the conflicts with the activist investors had cost the management of the bank a lot of time.

With an equity stake of over 70 percent, the investor group would then also dominate the bank’s orientation. At Aareal Bank, there is a lot of trouble when it comes to corporate governance, says an investor who is not involved in the deal. He assumes that the investor group will address this issue as well as the growth prospects.

There should be no dividends for the time being. Aareal Bank is removing the dividend payment of EUR 1.1 per share planned for December 9, which would have resulted in a cash outflow of EUR 66 million, from the agenda of the extraordinary general meeting. In the coming years, too, the profits are to be retained in full and invested in growth initiatives.

The spin-off from Aareon is off the table – for the time being

A spin-off of the software subsidiary Aareon would then be off the table, at least for a short time. From the point of view of financial investors, the software company is not yet ready for the stock market and must first be further developed, said a person familiar with the matter. Translated, this means: The topic could be tackled again at a later point in time in a few years. There are experts who assume that Aareon account for 80 percent of Aareal Bank’s value.

Advent, one of the two main bidders in the investor consortium, had already entered Aareon as a minority shareholder with 30 percent last year. The joint value creation plan worked out at that time is to be “pushed” in the event of a takeover. “With the support of the Bidder, Aareon can draw on additional funds for M&A activities and thus further accelerate its successful inorganic growth,” said Aareal Bank. In the past few months, Aareon had repeatedly made smaller acquisitions.

However, the growth of the bank should also be driven forward. In view of the high fixed costs at banks, this would also increase the return. In the event of a takeover, the bank aims to increase its loan portfolio to up to 40 billion euros in the next five years. New markets and property types should also contribute to this.

Takeovers of the targeted size are unusual for the German banking market – also because the market is considered difficult. More than 1,500 institutes are still vying for market share, resulting in weak margins and low profitability.

However, many financial investors have repeatedly seen opportunities in this in recent years. In 2018, the former crisis bank HSH Nordbank was the first Landesbank ever to be privatized and since then has been majority owned by financial investors Cerberus and JC Flowers. Cerberus has also acquired a stake in Deutsche Bank and has confidentially signaled its readiness to increase its stake in Commerzbank, should the federal government be ready to sell the 15 percent that it still holds in the major bank after the rescue operation in the financial crisis.

The Düsseldorf-based IKB, which also got into trouble during the financial crisis, was taken over by the US private equity house Lonestar in 2008, and the Oldenburgische Landesbank went to a consortium around the financial investor Apollo.

Financial investors are interested in specialist institutions

According to the partner of a German private equity firm, specialized credit institutions with a clear focus on attractive niches are particularly interesting for financial investors because these banks would have the opportunity to take market share from large, more diversified financial institutions.

In accordance with this strategy, the new owners have radically shrunk both the HSH successor institute Hamburg Commercial Bank (HCOB) and Düsseldorf-based IKB. At HCOB, the number of jobs has halved since 2015 and is expected to fall further to 750 to 800 by the end of the year. At IKB, CEO Michael Wiedmann has roughly halved the cost base and reduced the business model to promotional loans and SME financing.

“Financial investors are fundamentally much more interested in ‘asset light’ financial institutions, i.e. institutions with business models that require less capital,” said Sandra Krusch, partner at EY and head of private equity in the Europe West region of the Handelsblatt. Some private equity investors would also focus on traditional balance sheet-driven banks. The reason for this is often lower ratings in connection with business potential.

Aareal Bank also fits into this “loot scheme”. It specializes in commercial real estate financing, especially loans for hotels, shopping centers and offices, i.e. in segments that were hit particularly hard by the corona crisis. However, such loans are always secured with mortgages. As a result, the equity requirement is lower than with ordinary corporate loans.

The influence of financial investors has had a positive impact on other banks. The profitability of HCOB and IKB, for example, has improved significantly. None of the financial investors has yet successfully exited its German bank investments. Although Lonestar has held IKB for 13 years, the holding company has for the time being cashed in on the plans for an IPO this summer. Cerberus is unlikely to be particularly happy about its stakes in Commerzbank and Deutsche Bank. Commerzbank’s share price has slumped by around 40 percent since the investment company entered the market in mid-2017, and Deutsche Bank has fallen by 30 percent.

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