Special situation: Gagfah (ISIN LU0269583422)–> From take-over to potential Squeeze-out via Delisting

Management summary:

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.

Delistingn
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.

Jurisdiction: Luxemburg

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)_

Squeeze-out
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.

Summary:

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.

56 comments

  • According to Bloomberg, Vonovia filed a a merger document in Luxemburg valuing the shares at 19,74 EUR.. I couldn’t find the original doc.

    Gagfah Slumps as Vonovia Merger Ratio Values Stock Below EU20
    By Angela Cullen and William Canny
    (Bloomberg) — Gagfah slumps 10% to EU19.74 on German regional exchanges after ratio to merge the real-estate entity into acquirer Vonovia was published in Luxembourg register. Vonovia down 0.9% at EU34.35
    Ratio means holders get 57 Vonovia shares for every 100 shares of Gagfah, valuing the latter at ~EU19.58
    Vonovia currently holds 93.8% of Gagfah voting rights
    NOTE: Registration concludes 2015 merger transaction between the rival German real-estate companies
    Stock closed at EU22 Wednesday

  • I see the shares have dropped 9%+ today. Is there any news coming out today?

  • Indeep the downside danger is very limited with a pricepoint of 20 euro now

    one question I see now is the profit from a merger for the minorities not the same as from a squeezeout?

    • I think the biggest difference of a merger is that one is directly exposed to the Vonovia share price whereas the squeeze out would have been against cash. I am not sure if it makes a difference with regard to valuation as such.

      • Evaluation from “expert” should be same as squeeze out evaluation only payment is shares instead of cash

    • seems to be that JPM is unloading some of their shares… bbg IOIA shows that they traded 300k the last 5 days

      • Where can I check that that JPM is unloading?

        Vonovia needs only 1,2% of the JPM shares to reach the 95% target but I was thinking vonovia is executing the put option to buy all 5% back?

    • as Expected from my research

      • yes, you absolutely nailed it. Congratulations !!!

        • I have 101.000 Gagfah now lets see how many Vonovia I get 🙂

        • yes, this will be interesting. If you are not satisfied I think it would be relatively easy to appeal the offer in Luxemburg.

        • I just increased my Gagfah position from around 4,3% of the portfolio to 6%. I think the downside is limited and in my “expected” case I get 10% upside within a relatively short period of time.

        • “I have 101.000 Gagfah now lets see how many Vonovia I get 🙂”
          holy moly thats 2 Million Euros, and another 0,6 – 1 mn if your price assumtion of 26-30€ is right.

        • Question is now how Gagfah is evaluated and if a premium has to be paid

          do you have any example of other cross border merger?
          I know from squeezeout that a premium is very likely and this merger shoudl be evalauated as SO or?

  • here a small update
    now on feb 2017 the last cmbs was redeemed early from vonovia
    this is for sure a big ffo improvementg as the 3,4bn cmbs are now replaced with cash pool money (0% for gagfah I guess)
    this will lead to a nice ffo improvemt for vonovia and a much higher ffo improvemt for gagfah
    if the cmbs was a roadblock for any fusion then the door is open now

    Vonovia is somewhat forced to fusion with gagfah as in the long run they lose more money by not doing that and buch is proven clever and knows what to do

  • Any thoughts as to how Gagfah shares are trading post delisting?
    Is there a matching facility of some sort or is it all broker-driven?

    Tony

    • you can trade gagfah in hamburg its 15,30 atm
      http://www.boersenag.de/Aktien/LU0269583422/Times_and_Sales

    • It is a non-regulated tarding venue, i.e. no matching facility etc.

      • well its good enough to buy and sell

        • why are people selling them under €20 though? just realising profits? you’d think the ones who wanted to sell because deslisting and other ‘cosmetic’ reasons (i.e. non-fundamental) have already sold a long time ago. why not hang around for a few months for a potenntial €6-€10 / share?

        • well, that is always the question. Either they know more or less. Or they are happy with the return and have better ideas.

          I think the question of “who is selling” is not important. Personally, I do not think we see an additional 6-10 EUR per share. I do think something between 20-23 EUR is more realistic. But of course I would not complain about more,

        • As Gagfah is now virtual linkes to Vonovia Shareprice and 18:25 minimum + 2* Dividend is floor is see €25 as the bare minimum for a gagfah shared without any premium

      • is Hamburg the only venue to buy the stock? (no Xetra, no Frankfurt, no Luxembourg?)
        Do you expect to get around 1,5 Vonovia shares for each Gagfah? (that would mean a 10% upside from the current €20 share price)

      • (why is it that you can only use the ‘reply’ funcion on some of the posts?)
        anyway, the 5-10% potential upside you expect (as opposed to 20%+) is more in line with ‘people selling the stock cause they have identified better investments’

        are we 100% sure now that you don’t get cash for the Gagfah shares, but only Vonovia shares? This way it’ be tax-free for me (unlike getting cash)

    • Just spoke with the Gagfah IR…. very nice lady.

      She has no clue about trading volumes. They keep a share register as well non the less.

      No visibility at all as to when an independent valuation will be instructed she says….

  • Squeezeout is not possible. Fusion is the way to go. Without fusion gagfah ist somewhat blocked for Vonovia.
    With news pricetarget of €46,90 for Vonovia I would assume with same evaluation Gagfah pretty close to €40
    Its not unusual that on fusion you get paid a premium so who knows

    maybe Gagfah get 1:1 exchanged in Vonovia which would be my dream and somewhat payout the “painful” holdout

  • no squeezeout
    gagfah and vonovia are in fusion talks now -> share deal

    • yes, A cross border merger seems to be the most likely outcome.

      • fusion talks already started so question is how to calcualte fair value according to vonovia share
        When I see ffo I think fair value of Gagfah is about €25
        so loadup gagfah as much you can

        • I have enough already. Also I am not sure that Vonovia will be 100% friendly to minorities. That was at least my impression from the AGM last Friday.

        • Fusion is a law defined system so its a gagfah to vonovia share transfer
          the fair value will me most likely defined by future ffo where gagfh can be par with vonovia based on synergy addon
          as only 1,2% of gagfah are left I think vonovia dont care too much if they can or must overpay
          based on FY2015 ffo numbers I see €22,50
          based on FY2016E ffo numbers I see €30,00

        • dividendhunter

          immo2014 why are you so bullish? They have absolute no hurry for the squeeze-out and I would not be astonished if they would find a way to screw the soldiers of fortune

  • To take the Utopia example of Luxembourg Squeeze out is intesssting to see that the Tender Offer was €25 and the Squeezeout Price was €47

  • OMG you are right
    I am 100% sure
    Vonovia will vote on GM 12.5.2016 to proceed with Luxemburg squeeze out in concert with JPM
    I expect cash north of 25 Euro based on Evaluation of Vonovia Market price
    No big deal because Vonvia already scared out most of minorities with the delisting and 1,2% are peanuts

  • This is Luxembourg Law, no. Is it the same.

  • Very interesting idea indeed, thanks! I could also emagine some kind of high dividend to get the cashflows to Deutsche Annington, which would make Gagfah an interesting long-Term Cashcow. So even the downside is not that bad in his case.

  • Nice Write-up, but to ‘Special’ situation to me. The fact that DA involved JPM hints to a careful constructed deal and is reason enough for me to stay out.

    Covacoro

    • the role of JPM here is pretty obvious. It’s actually the same structure for all German Real Estate company take over. The specialty ist the Luxemburg Squeeze out rule.

  • I went to Annington’s AGM. Mr. Buch commented that they decided Gagfah should pay a dividend (if you recall, there was some confusion whether they would pay one or not, check the older press releases) because it would “appease” the Luxemburg regulator regarding a delisting/squeeze-out – whatever that means in practice.

    One other remark: DA is currently carrying out a 30% capital increase with subscription rights, these have a value > 1.5 EUR that you would need to add to the offer price (in theory). This makes is a little more complicated.

  • They would still have to pay the tax. I believe it is cheaper to stay with the minorities. Annington can stonewall. They could change the venue of AGM to a remote place and for what porpuses does the vote of minorities count, if Annington has majority? Cash pooling and intercompany loans could be used. The don’t need to pay a dividend. In my opinion this case rests upon Annington’s management to waste other peolple’s money (shareholder’s), which may be even likely.

    If Annington makes an offer after 10yrs my understanding is Annington would just have to pay tax for the remaining 5% and not for the whole of Gagfah’s German real estate, but I am no expert and German tax laws are not easy to understand.

    If you compare to 10yrs Bund this seems to be good risk reward nonetheless, but with low liquidity.

    • Hi Martin – how do you know they have to pay the tax? Acting in concert with JPM, DA wouldn’t pass the 95% hurdle triggering the payment when doing a squeeze out under Luxembourg law…?

    • #Martin,

      once the stock is delisted and minorities are out, there are ways to avoid the tax. The problem ist that as long as you have minorities in Gagfah, transactions will have to be done at “arm’s length”. If this is not the case, shareholders could sue them.

      It is clearly a “bet” dpenedning on Annington acting rationally and liquidity is low.

      mmi

      • Arm’s length is in my opinion only a problem if a shareholder sues and it is not well defined.

        I have to admit I do not know the ways to avoid the tax. Annington has properties in Germany and I believe a German tax audit could revert some questionable stuff in case they try something new.

        You could also look at Westgrund with a similiar thesis (but under German law). Westgrund’s mcap is even smaller and thereby smaller probability another shareholders sues for the sake of the minorities in case of special corporate action. After Adler’s offer expired the westgrund price dropped. The offer was cash+shares.

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