Special situation: Gagfah (ISIN LU0269583422)–> From take-over to potential Squeeze-out via Delisting
In my opinion, the stock of Gagfah offers an interesting risk/return profile as special situation investment:
– the current price at 12,35 EUR is ~1/3 lower than the expired take-over offer from Deutsche Annington 6 weeks ago
– although the share will be delisted by the end of the year, I do believe that a squeeze-out under Luxembourg law is very likely within the next 12-18 months close to the initial offer price (~ 50% upside from current price)
– the downside is that following November, the stock will be unlisted and hard to sell and that for some reason the Acquirer Deutsche Annington will not squeeze out the remaining minorities
Health warning / Disclosure: This is no free lunch, there are plenty of risks involved among others getting stuck with an unlisted stock. This is not investment advice, DO YOUR OWN RESEARCH. They author might have bought the stock already before posting this.
Background: Gagfah was a vehicle created by private equity group Fortress and held a large portfolio of residential real estate in the eastern part of Germany. The company was IPOed 2006 at then 19 EUR. During the financial crisis, Gagfah was hit hard and the stock price went down to 2 EUR.After recovering, Fortress sold out and Gagfah was the biggest listed retail real estate company.
In December last year, Deutsch Annington, another initially Private Equity created listed real estate company made a take-over offer for Gagfah.
The initial terms were 122,52 EUR and 5 shares of Deutsche Annington for 14 Gagfah shares which was equivalent to ~18,68 EUR at the time of the expiry of the offer. Deutsche Annington finally got offered 93,82% of Gagfah and in March closed the take-over. Deutsche Annington’s ultimate goal is clear: They want to create a Group which is big enough to get into the German DAX index. At currently 11 bn EUR market cap they are already bigger than 3 Dax constituents, Lufthansa, Lanxess and K&S.
Most likely to “motivate” shareholders to tender, Deutsche Annington added something “Nice” in the press release I linked to above:
The Board of Directors of GAGFAH believes that a large number of GAGFAH shareholders will exercise their sell-out right. This would lead to a further decline in the company’s free float, which is already very low at slightly above 6%. In light of these developments GAGFAH’s Board of Directors has today resolved to file for a delisting of GAGFAH shares from all stock markets where the shares are listed. Making the delisting decision now will give the remaining GAGFAH shareholders sufficient time to tender their shares to Deutsche Annington before the delisting becomes effective. The Board of Directors expects the delisting to become effective six months after its public announcement by the management of the Stock Exchange. Following the delisting, GAGFAH shares will no longer be traded at a stock exchange.
So DA seems to try to profit from the new German “specialty” that you can delist shares from German stock exchanges more or less “at will” without offering any further compensation. Looking at the stock chart we can clearly see that once the offer expired, the stock price came under pressure, although with a certain time lag.
For some reason or another, around 1% of shareholders did not accept the offer. The true remaining free float is around 1% of the shares or~40 mn EUR if we deduct JPM’s 5%.
Real estate transfer tax:
The normal sequence of events is that after a tender offer, the next logical step is to “squeeze out” the remaining shareholders who did not tender the shares.
One of the problems with squeeze outs of real estate companies is that if the target owns German real estate, then a real estate transfer tax has to be paid. In Germany, the threshold for whatever reason is if you buy more than 95% of a company, then you have to pay the tax. In Gagfah’s case, this would have been around 400 mn EUR which is substantial. In order not to accidentally cross the 95% threshold in their offer, Deutsche Annington enlisted JP Morgan to buy and hold 5,1% of the shares and not tender them.
This creates of course a problem for Deutsche Annington_
In order to be able to “Squeeze out” minorities, you need to own at least 95%, both in Germany and Luxemburg, but once you have 95% you have to pay the 400 mn. On the other hand, getting rid of potential uncooperative minorities is very important in order to realize the projected synergies which were the underlying motivation of the deal.
So far so good, but now come the more interesting parts. Gagfah is a company based in Luxemburg, so Luxemburg law applies here with regard to take-over, tender offers, Squeeze out etc. One specialty in this case was that after a tender offer, shareholders who did not tender had an additional sell-out right to the acquirer for another few month, in this case May 1oth.
The Luxemburg Squeeze out specialty:
Luxembourg has a little but important difference to Germany when it comes to Squeeze outs which is the following (taken from a law firms pdf found here)_
A holder holding (individually or jointly when acting in concert) at least 95% of shares or other securities of the capital carrying voting rights and 95% of such voting rights (a “Majority Holder”) in a relevant company may require the remaining holders of securities to sell him those securities at an equitable price in accordance with the procedure foreseen by the Law.
The trick is here the “Acting in concert”: In our case, DA and JPM “jointly acting in concert” can squeeze out minorities following Luxemburg law. According to Luxemburg law, this squeeze out has to be done latest 5 years after a delisting. If JPM and Deutsche Annington do this jointly, they can eliminate all other minority shareholders which is clearly the ultimate target of Deutsche Annington. They can clearly live with a “paid” and silent minority holder JPM.
The Luxemburg squeeze out law is pretty new (2012) but has already been tested in the Utopia case. Overall, it looks like the procedure is pretty simple and short. The acquiring company makes an offer and if no one objects, the deal can close within 3 months. If any shareholder doesn’t like the offer, she/he can complain with the regulator and the regulator will organise an independent valuation. Even with such an objection, one recent case (Utopia) closed with 12 months or so.
Actually this is the major point of my case or the “What do I know that others don’t know”: I do think that not many investors know about this Luxembourg specialty and therefore don’t think that a Squeeze out will happen.
Risk of a law ball Squeeze-out bid
I think that the risk of a low ball bid is relatively low. Why ? Because Deutsche Annington has already 94% at 18,60 EUR on its books. If they come up with a new valuation for the rest, they automatically will have to write down their goodwill (and NAV) on their balance sheet and this is very unrealistic. Especially with Deutsche Annington targeting the DAX, a 1 bn EUR plus write-off on a fresh acquisition would not look good.
Risk of no squeeze-out
From my own experience I am pretty sure that Deutsche Annington wants to get rid of minority shareholders. Even with a delisted share, you still have to do an annual meeting, do reports etc. Even worse, in order to actually realize synergies, there will be a lot of corporate restructurings etc. and this is much more difficult if you have independent shareholders in the capital structure. They could always come up with objections etc. In general after a take-over, if there is a possibility to “clean up” the shareholder base, acquirers will do so at some point in time. Clearly they want to do it as cheaply as possible
Deutsche Annington has communicated far-reaching synergie efforts, among others the merging of headquarters and an integrated capital market funding. In order to achieve this, minorities in the acquired company can be a real pain.
For me an ultimate weapon” in such a case would be to buy some Deutsche Annington shares and start to annoy them on their annual shareholders meeting until they make me an offer……
Theoretical value of the initial bid with current DA share price:
As the Deutsche Annington share has fallen since the take over, the theoretical value of the initial offer is now 8,75 EUR + (5/14)*25,42 = 17,83 EUR.So one could argue that this would be a “fair price” aswell. However I don’t think that they go for a lower price because then they will have the same issues as mentioned above with a potential lowball offer.
Investing Game plan:
I do expect that pretty soon after the delisting, Deutsche Annington will go for a Squeeze out most likely close to the initial offer. As an investor however I need to be prepared to hold an unlisted stock at least for a couple of months. My best case would be that no one objects and the money will flow early 2016
The most likely case is that they make an offer either end of 2015 or early 2016 and someone objects. The money then will flow most likely early 2017.
In a bad case Deutsche Annington waits the full 5 years to go for a squeeze out. Then one is locked in for 5-6 years in a non-listed assets. Maybe there are dividends, maybe not. In this case, the return will most likely be only single digits p.a.
I would prepare to sell the shares before the delisting if the share price goes back up to ~16 EUR or a potential 30% upside, but I don’t think there is a very big likelyhood for this.
Overall, I do find Gagfah at the current price of 12,30 EUR a very attractive squeeze out play, especially it is quite uncorrelated to any market movements. As described above, I think that very few people are aware of the Luxemburg specialty with regards to Squeeze out and therefore the potential Delisting is already pretty much fully priced in. Despite the delisting in November, I will invest around 3,3% of the portfolio into this special situation.
Again a reminder: This is not investment advice. The stock is relatively illiquid and will be fully illiquid in 5 months time. DO YOUR OWN RESEARCH.
EDIT: I have written the blog post already a few days ago, I know its kind of unfair to post it when the stock is already up, but I really didn’t have the time to finish the blog. Despite me sloppy grammar and spelling, it still takes me some days to organize my thoughts in a more or less coherent post as I have very limited time each day to actually do the writing. So sorry for the delay.