Come together – right now

In April, the big story was the launch of the bid by Prague-based CPI PG with German partners Aroundtown to take over Globalworth – the largest office portfolio owner in both Poland and its home country Romania. A few days afterwards, it was revealed that the merger (initially announced in February) between Polish company Echo Investment and its Wrocław-based residential development counterpart Archicom had been sealed. While back in March, Immofinanz embarked upon its latest attempt to buy out its rival on the Austrian market, S Immo. Both Immofinanz and S Immo also have considerable portfolios across various real estate sectors (but mainly office) in the CEE region. And in February, US investor Starwood Capital launched a bid (so far stalled) for another major Austrian player active across the CEE region, CA Immo.

There really had been little or no activity of this kind (i.e. corporate takeovers, mergers and acquisitions of portfolios and platforms) since just before the Covid-19 outbreak, when, for example, GLP bought Goodman’s warehouse portfolio in the CEE region for EUR 1 bln. Around that time, Hungarian developer Wing raised its shareholding in Echo Investment to 66 pct, following its acquisition of a 56 pct stake in late 2019. Both Wing and GLP could be forgiven for being smugly satisfied with these acquisitions, given that the warehousing and residential segments – now referred to as “sheds and beds” – have actually flourished during the lockdown in comparison with other areas of real estate. (The consolidation on the residential market, including the Echo-Archicom merger, is covered in more detail on pp. 24–28 of this issue of Eurobuild.) But the office market, where much of the latest takeover activity has been happening, has fared less well during the pandemic – and the picture is less clear for how it is likely to develop in the future. Warehousing has clearly been going from strength-to-strength, fuelled by the boom in e-commerce that has itself been accelerated by the pandemic. And when it comes to the residential sector, people are always going to need homes even in hard times – and maybe now even more so due to the switch to the home office and the possibility that hybrid work is here to stay. The obvious question that arises, therefore, is whether the current spate of consolidation (or attempts in that direction) has somehow been triggered by the fact that we might just be finally emerging from the pandemic – and that office portfolio owners might be particularly susceptible to takeovers due to the uncertainty surrounding this market’s future.

Losers and winners

“In my view the pandemic has not had a major impact on the real estate market in terms of mergers and acquisitions, as this was always an active sector of the market,” believes Mike Atwell, the head of capital markets for the CEE region and the Czech Republic at JLL. But as he goes on to explain: “What has changed is that there are potentially more M&A opportunities due to the general impact the pandemic has had on all aspects of the market. There have been changes in valuations in certain sectors – some have gained, some have lost ground. These types of transactions were already active in the real estate sector and I see this continuing. You could call it globalisation – large corporations are always looking to grow and expand.” A slightly different opinion, however, is provided by Jeff Alson, an international partner and the head of CEE capital markets at Cushman & Wakefield: “All these companies have taken a hit because of the pandemic, which has reduced their valuations. As normal when markets are down some investors aim to use this as an opportunity increase their exposure at a more advantageous price, so potential market consolidation is expected in this respect. These bids have to been seen as having a realistic chance of success if only because companies making them feel that they can realistically succeed. They are being driven by public valuations going down, so it seems that the pandemic is maybe playing a large role in the latest spate of consolidation,” says Jeff Alson.

Despite that subtle difference in opinion, several factors do seem to be at play. One is that there is a lot of capital on the market that had perhaps been pent-up by the uncertainty brought on by the pandemic, as companies waited to see which way the wind was blowing in terms of the best opportunities for expansion. Another is the lack of available product in terms of individual assets, prompting those looking to grow their portfolios and stock value to turn to acquisitions of whole companies and platforms instead – as these have become relatively much more attractive buys as the pandemic has contributed to downward fluctuations in valuations.

Comparing apples and oranges

Nevertheless, there are significant distinguishing features between all the current examples of market consolidation mentioned, which does make it rather difficult to draw any general conclusions about what is happening right now. In the case of Echo Investment and Archicom, these are both residential developers operating in the same country but dominant in different sub-markets. Therefore combining forces might be seen by both parties to be mutually beneficial. Smaller players who are maybe struggling to raise finance in the present situation might also welcome mergers to give them greater clout with lenders. The takeover bids for S Immo and Globalworth, on the other hand, have not been welcomed by their management boards. “The activity involving larger players, however, does seem to be much more opportunistic,” admits Jeff Alson of Cushman and Wakefield. But even in these two cases, the motivation appears to be different. When it comes to Immofinanz and S Immo, we also have to mention CA Immo, since all three companies seem to be embroiled in a long-running saga of on-off and sometimes on-again attempted takeovers of each other. All are Vienna-based with similar profiles across the CEE region. Each (directly or indirectly) holds stakes in the others, sometimes as a result of the aborted or stalled merger attempts between them in the past [see box]. For some time now there has been speculation that all of this will inevitably end in a three-way merger between them, fuelled by the perception that there are might be too many firms like this on the Austrian market focused on the same product – i.e. assets across the CEE region. Jeff Alson explains how this situation arose: “Historically Austria has been the base for capital into CEE real estate and as such there may be too many companies offering too much of the same product, although I understand that the capital base of some of these listed companies has been gradually changing over the last few years.”

The nature of the takeover bid for Globalworth is also rather different, as Mike Atwell of JLL points out: “In cases like that of CPI, these are companies that are looking to expand into new markets – such as Romania, where CPI hasn’t been present but Globalworth is a major force.” And, as he adds: “It’s not really the case that the pandemic has resulted in lots of smaller players with distressed portfolios being picked off by larger, opportunistic investors.”

A trend or a blip?

So is this latest round of consolidation merely a passing phase, brought on by the current volatility of the market? Or, since it also appears to be a resumption of the M&A activity that was broken off by the outbreak of the pandemic, is it now set to continue? Again, the expert opinion seems to be divided. According to Jeff Alson of Cushman & Wakefield: “The activity does seem to be fairly opportunistic in my opinion and maybe doesn’t represent a longer-term trend for consolidation.” Whereas Mike Atwell of JLL is of the view that: “The consolidation hasn’t been triggered by the pandemic and so it won’t stop after it. There will continue to be a significant weight of capital in the market. I certainly agree that what we are seeing is consolidation as a long term trend. We will be seeing more of these mergers and JVs.” As Mike Atwell concludes: “Mergers and acquisitions are nothing new – they have always been happening. The impulse towards M&As is not being provided by the pandemic itself, but some companies have been mispriced and some are not performing very well. Some are operating in very different macro-economic environments to others, and although they may feel that a takeover bid undervalues them, they may also not be in a position to defend themselves against a hostile takeover. It is not the case, however, that there are too many players. The market is not over-populated. There is simply too much money in the markets looking for a home.”

Viennese game of thrones

Immofinanz’s voluntary public takeover offer to acquire a controlling interest in S Immo priced its rival at EUR 18.04 per share. It has since increased its offer to EUR 22.25. If successful, the offer would add 69.93 pct of S Immo’s shares to Immofinanz’s current holding of 26.49 pct, valuing the bid at more than EUR 1.14 bln. S Immo still claims, however, that this undervalues the company and has also refused to lift its policy of limiting its shareholders’ voting rights to 15 pct – a condition Immofinanz has placed on the bid. The acceptance of a minimum of 50 pct+1 of S Immo shares is required for the offer to be successful, with the acceptance period running between May 19th and July 16th. At the end of January, it was announced that the CEO of Immofinanz, Ronny Pecik, was to step down upon the completion of the sale of his share in a vehicle that owns 10.56 pct stake in the company to Revenite Austria, a vehicle controlled by Luxembourg-based Aggregate Holdings, which is wholly-owned by Austrian investor Günther Walcher. However, for this to go through the co-owner of the vehicle, Peter Korbačka, the founder and CEO of Slovakian developer J&T Real Estate, would have to agree. This consent had not been given by the March 31st deadline and thus Pecik (at the time of writing) remains the CEO of Immofinanz. Pecik is also a major shareholder of S Immo, which was the subject of a failed merger with Immofinanz in 2019. In Q2 2018, a potential merger between Immofinanz and CA Immo also fell through. S Immo currently holds a 6 pct stake in CA Immo.

Since the beginning of this year, Aggregate Holdings has bought minority stakes in both Immofinanz (10.54 pct) and S Immo (10.79 pct). It also confirmed market speculation that it was considering a takeover bid for CA Immo, which could derail the takeover bid of the latter’s largest shareholder (with a 30 pct stake), US property investment company Starwood, which was launched in late February. However, immediately after its offer of EUR 34.44 per share was placed, the stock market price rose above that level, where it has remained ever since. Aggregate has yet to make any definite move for CA Immo and insists that a bid might not materialise. Pecik also played a part in Starwood’s acquisition of its stake in CA Immo in 2018. This resulted in the failure of Immofinanz’s own takeover bid for CA Immo at the time, prompting it to acquire its 26.49 pct stake in S Immo instead, which it is now using as the launch pad for its current takeover bid. S Immo also owns an almost 12 pct stake in Immofinanz.

In September 2020, S Immo’s portfolio comprised 351 properties with a book value of EUR 2.43 bln, 70 pct of which was offices, shopping centres and hotels with the remainder being residential. Around 33 pct of this was in the CEE region. CA Immo’s mainly office portfolio is valued at around EUR 5.3 bln. And Immofinanz, which is traded on the Vienna and Warsaw stock exchanges, has portfolio of office (65 pct) and retail (33 pct) that was valued at EUR 5.1 bln at the beginning of last year. All three companies are active in Austria, Germany and the CEE region.