Changing hands

The list of companies in the region that look likely to undergo significant changes in their ownership structures is long and the assets in their portfolios go into the billions of euros. These include GTC, Echo Investment, Robyg, TriGranit, Qualia, Polnord, Ronson, CA Immo and Immofinanz. There has been a great deal of movement recently, at a time when there is more interest in the real estate market in the region than there are individual assets available for sale.

What else can we buy?

The present financial policies of some of the largest institutions in the world have led to a situation in which vast amounts of capital are now circulating on the international investment market. And a significant amount of this is headed for the real estate market. According to Preqin, in Q1 2015 real estate funds raised the record amount of USD 29 bln. Admittedly, the lion’s share of this is attributed to the Blackstone fund, which has acquired the global real estate portfolio of GE Capital Real Estate. However, this does not change the fact that investors’ appetite for real estate assets is still huge. “There has been a change over the last 18 months. We have noticed more entities interested in such projects. This is partly the result of an increasingly difficult direct investment market due to the insufficient number of investment products available,” says Mike Atwell, the director of CEE capital markets at CBRE. “Larger investors from Europe and the US are looking for opportunities to enter markets through acquisitions of companies which already operate on it. Among the chief examples are Lone Star, which has acquired part of GTC, and Pimco, which is investing in Echo Investment. We are also currently witnessing the acquisition of one of the largest Central European developers [the acquisition of TriGranit by TPG – editorial note] by a very large international player. The main reason for these acquisitions is the lack of attractive properties to buy, so companies are being bought instead,” adds Mike Atwell. Much points to the fact that this is not just a temporary fad among investors. The appetite for shopping has been whetted by the financial policies of the largest central banks as well as significant variations in yields between individual regions. “We have been working in a low interest rate environment for a few years and it is likely that this situation will continue. There is also a large supply of cash. This is what is driving the investment market,” argues Przemysław Krych, the CEO and founder of Griffin Real Estate, which manages Pimco’s assets, among others. However, this is not the full story. “The differences in yields is playing an important role. In Western and Southern Europe there has been significant compression in the last two years, particularly in Spain, Germany and France. In Central Europe there has been no such compression so far. The higher yields and the cheaper properties that go with them, as well as the strong economic foundations, are the main factors fuelling investors’ interest in this part of the continent. The expectation is that this capital’s interest in investing in the region will be sustained, and in fact could even increase, particularly in the case of capital from the US, Europe and the Middle East,” believes Mike Atwell of CBRE. However, purchasing decisions are ultimately determined by the potential for profit. “Everything is a matter of the prices and margins that are possible to obtain, and whether this justifies the effort undertaken,” adds the founder of Griffin Real Estate.

Griffin’s treasures

Griffin and its partners (Oaktree and Pimco) currently have one of the most voracious appetites for acquisitions, having been responsible for two sensational buyouts on the Polish market. First there was the purchase of the Qualia Development company from the PKO BP group; next they broke the bank by taking over Echo Investment – Poland’s largest developer – in a deal estimated by the market as worth around PLN 1.1 bln or even up to PLN 1.3 bln for Michał Sołowow’s 41 pct stake in the Kielce-based company. However, the new owners are reticent when it comes to revealing their plans for Echo and Qualia. “I cannot speak about our plans for the future and the strategy of Echo Investment before we receive consent for the acquisition from the European Commission and finalise the transaction. This also goes for Qualia,” explains Przemysław Krych. However, he immediately added: “We are not a developer, we are an investor. Indeed, we have bought a few projects that required us to take on the development business, but these were very much exceptions. That is why we are now taking over developers so that we don’t have to deal with any of that any more. Griffin has never had the ambition to become a developer. We are an investment manager – this is what we are good at and this is what we will continue to do,” the founder of Griffin Real Estate insists. And this is something that can be believed, since Griffin seems to be far from losing its appetite for such acquisitions. The company is currently eyeing up three other firms. Przemysław Krych remains tight-lipped about who they are, but did disclose that he wants to buy at least one more company this year. The talk on the market is that it could be Ronson. “We cannot provide any detailed information at this stage and can only confirm that a process initiated last year by our major shareholders is continuing, says Tomasz Łapiński, the financial director of Ronson Europe.

It takes two to tango

The substantial demand for assets has not been met by the supply. Unsurprisingly, the stocks of developers on the Polish stock exchange have started to burn the hands of their owners – particularly in the last few quarters, that. “For companies listed on the Warsaw Stock Exchange the general problem could to a certain extent be the stock market itself. It is simply not liquid enough. The government has recently imposed restrictions on the activities of open pension funds, and so far there has been no indication of any imminent incentives for them to invest their funds on the stock exchange. All of this has had a negative impact on the liquidity of the Warsaw trading floor. On top of that there have been a few unsuccessful flotations. In a nutshell, the Warsaw stock exchange is no longer as attractive as it was 3–5 years ago. Today it is easier for companies to secure funds from outside the stock exchange, for example, in investment funds,” explains Przemysław Krych, who has been dealing with private equity activities since the mid-1990s and so corporate acquisitions are nothing new to him.

The recent corporate reshuffling does not look likely to end any time soon. “The majority of transactions concluded so far have been carried out by private equity and venture capital from the United States, operating through European or Polish managers. We expect more mergers and acquisitions over the next twelve months as well as potential consolidations among developers,” forecasts Soren Rodian Olsen, an associate and office, industrial and warehouse investment director in the capital markets group at Cushman & Wakefield in Poland.

This seems to be the case across the CEE region. However, not all the recent corporate acquisition activities in this part of Europe have had successful outcomes, as we can see from the dramatic twists and turns of what would have created the region’s largest real estate player.

Viennese intrigue

The attempt by CA Immobilien (CA Immo) with Russian partner O1 Group to buy a significant stake in rival Austrian giant Immofinanz, with a view to an eventual takeover, has perhaps been the most intriguing – and the most acrimonious – takeover battle so far this year. It would have created the largest real estate investor in the region, with a combined portfolio worth around EUR 10 bln. Both companies are active in Austria, Germany and the CEE region, mainly in the office and retail sectors; but CA Immo’s bid was buttressed by the involvement of O1 Group, owned by Russian tycoon Boris Mints and also a shareholder of CA Immo.

Immofinanz and CA Immo both admit that they had some kind of a working partnership until recently, but the precise form this took has now become obscured by a series of claims and counter-claims each side has made of the other’s impropriety. The acrimony between the parties became apparent in late February, when CA Immo and O1’s intention was announced to buy a stake of around 15 pct in Immofinanz, possibly at around EUR 2.51 a share – a 15 pct premium on Immofinanz’s three-month share average. Eduard Zehetner, Immofinanz’s CEO, responded to the bid by indignantly claiming that this vastly undervalued the company and that for the bid to succeed investors would have to offer EUR 4 a share. Bruno Ettenauer, the CEO of CA Immo, has told ‘Eurobuild CEE’ that: “Our initial idea was to have an active investor role, supporting Immofinanz in focusing their business with the goal of making it more profitable. This cooperation could generate synergies, since we are active in the same regions, such as Russia with O1 Group, for example.”

In mid-March a bid was officially announced to buy a 13.5 pct stake at EUR 2.80 a share to add to CA Immo’s existing 3 pct holding in Immofinanz. The news was accompanied by the disclosure that O1 had increased its stake in CA Immo to around 26 pct. This drew a furious response from Immofinanz, which a week later launched a counter-bid to buy 29 pct of CA Immo at EUR 18.50 – move was described in a CA Immo press release as: “an emotional response to the offer of CA Immo. Our offer remains unaffected (…). In the light of the current challenges in Russia, that were also evidenced by the recent disappointing Q3 results, we – as a 3 pct shareholder in Immofinanz – currently see different priorities for Immofinanz AG.”

Not standing still

The plot then thickened, when Eduard Zehetner declared in an interview published in Austrian publication ‘Profil’ that CA Immo had broken an agreement made in March 2014 between the parties not to launch takeover bids against each other. He also alleged that prior to CA Immo and O1’s announcement of their bid to buy a 13.5 pct stake they had been surreptitiously buying up Immofinanz shares through entities registered in Cyprus and the Cayman Islands. He went on to accuse the companies of being asset-strippers, who would halve the size of his company within three years if they took over. CA Immo and O1’s joint response to this attempt to scupper the share bid was to turn to their lawyers, threatening Mr Zehetner with legal action if he did not refrain from publishing “false and misleading statements”. In their statement they countered his remarks by insisting that no such stand-still agreement was ever in place, suggesting that even if there had been some kind of understanding, this was in any case completely invalidated by a subsequent bid by Immofinanz last summer to buy into CA Immo. The statement concluded in stark terms: “We call on Mr Zehetner and Immofinanz to stop actions that interfere with our tender offer and to stop taking actions that harm the interests of all shareholders.”

In the event, when the results of CA Immo’s bid were announced in mid-April, CA Immo and O1 only managed to raise their holding in Immofinanz to 6.1 pct. Eduard Zehetner claimed victory, thanking shareholders for not accepting the bid. “As a result of the great foresight shown by Immofinanz shareholders, the bidders have failed to meet their goal,” he declared. Immofinanz also reduced the threshold for a mandatory takeover from 30 pct to a 15 pct shareholding, making the kind of gradual takeover being undertaken by CA Immo and O1 more challenging, while also calling off its own bid for CA Immo. However, this may not be the end of the story. A new CEO is to replace Mr Zehetner on May 1st, who CA Immo are seemingly more keen to work with. “We are the company’s second largest shareholder,” Mr Ettenauer told us. “We now need to evaluate our next steps and further options,” he added. “but we are optimistic that we can go in a more fact-oriented discussion now with the new CEO, Mr [Oliver] Schumy, and Mr [Rudolf] Fries, the core shareholder of Immofinanz. In the end, the goal is to create value for both our shareholders. A cooperation and shared expertise would make sense for both our companies; I think that all parties agree on that. And we hope that Immofinanz will work constructively to create value for the benefit of all shareholders, including us.”