A few weeks ago news came out that DIC Asset AG (OTCPK:DDCCF) wants to acquire majority ownership in VIB Vermögen AG (OTC:VIBVY). VIB Vermögen AG is an owner of logistics real estate throughout Germany but with a specific focus on the south of Germany. With the expected closing date approaching, I explore if this move makes sense from DIC Asset AG’s point of view.
Companies
DIC Asset AG
DIC Asset AG is a real estate owner and asset manager focusing on commercial real estate. Up until 2017, the company was mainly focusing on owning (office) real estate on its balance sheet, but the company’s strategy changed when Sönja Warntges became the CEO. Since she became CEO she made a clear distinction between the company’s two segments: commercial and institutional. The commercial business is focused on owning real estate (as well as warehousing them for funds), and the institutional business is the asset management segment of DIC. Since the company has made a clear distinction between the two business models, the company has grown its assets under management significantly from €2.8 billion in 2017 to €9.3 billion at the end of 2021.
In 2020 the company acquired RLI Investors. This acquisition was made in order to continue its growth and boost its area of expertise in logistics real estate. Since then the company has launched three logistics real estate funds and increased its logistics assets under management by 18 times. The addition of logistics real estate is both good and bad. At the moment there is a hype surrounding logistics real estate and cap rates are near all-time lows, while some tenants are not even close to being investment-grade rated. Nevertheless, there are a lot of investors that are interested in this kind of real estate and thus the acquisition of RLI Investors has paid off.
The growth of the company’s AUM and to a lesser degree its acquisition of RLI Investors can also be seen in the company’s earnings. In 2017 the company had an FFO of €60.2 million, while in 2021 the company had an FFO of €107.20, meaning that the company has been able to almost double its FFO.
VIB Vermögens AG
VIB Vermögen AG is an owner and developer of real estate, with a focus on logistics real estate. At the end of 2021, the company received approximately 70% of its net rental income from this sector.
Most of the company’s locations are in Southern Germany and it is active in most major markets in this area. The main focus lies on Bavaria with approximately 80% of its properties located here.
Bavaria is one of the most expensive regions of Germany and in 2021 the Bundes capital city, Munich, had the highest rent for logistics real estate in Germany. Munich had a median rent of €7.55 per m², which was €0.80 higher than the number two on the list, Frankfurt.
The strong real estate market in Germany in combination with the company’s development arm has led to stellar growth over the past few years. In 2016 the company had an FFO of €35.8 million, while in 2020 the company had an FFO of €50.4 million, a CAGR of 8.3%. NAV has seen similar growth, growing from €470.1 million in 2016 to €666.3 million in 2020, a CAGR of 9.1%.
The current difference in strategy with DIC Asset AG is that VIB Vermögen mainly owns the buildings and rents them out and has more capabilities when it comes to logistics real estate development. DIC Asset is mainly an asset manager and currently only has a small development arm in logistics real estate.
The Offer
On the 31st of January, news came out that DIC Asset AG was looking to purchase a majority stake in VIB Vermögen. The company announced that it would offer shareholders of VIB Vermogen a price of €51 per share, representing a premium of 34.9% over the shares closing price and a 94% (!) premium over the company’s last reported EPRA NTA (Net Tangible Assets).
The goal of the offer is to gain a majority stake in the shares of VIB Vermögen. DIC Asset already owned approximately 10% of the shares of VIB and the maximum the company plans to own is around 51%. DIC Asset is planning to initially finance the deal with cash on the balance sheet as well as a bridge loan. The company is planning to refinance this in the short to mid-term after closing the acquisition, with 10% coming from accelerated book building and the remaining part with debt.
The offer isn’t supported by everyone as VIB’s management has said they are against it on multiple occasions. The reason for this is that they see the offer as uninvited, not representing an appropriate control premium (!), and not reflecting the company’s growth potential. In my opinion, this is a bit far-fetched given that the premium was almost 35% over the company’s closing price and 94% over its NTA.
Effect on DIC Asset
Effect on performance
DIC’s management expects the deal to be immediately accretive to FFO. The initial increase in FFO, after taking into account new share issuance and financing, is approximately €0.19 per share. However, the deal that DIC is offering to VIB shareholders is mainly based on synergies. As mentioned before, DIC currently does not have a large development arm for logistics real estate. Additionally, it will increase the number of properties it could potentially offer to investors in its funds.
Another thing that DIC mentions in its presentation is the addition of VIB’s development pipeline. The pipeline of VIB currently consists of 6 projects. These projects should add up to 175.400 sqm to the portfolio of VIB.
My take on the deal
In my opinion, the premium that DIC wants to pay for VIB Vermögen is too high. I understand that there is a lot of demand for logistics real estate, but I think that the market for logistics real estate will cool off eventually. The reason for this is that logistics buildings go for very low cap rates, even if the tenant is not investment-grade rated. Furthermore, the interest rates have been very low in Europe for the past couple of years and I expect this to rise in the future. This will most likely lower the price of (commercial) real estate. Thus, in my opinion, the current premium is not warranted. I am not 100% against the deal though as the synergies between the companies can be a huge positive for DIC Asset, as it will be able to reach its goal faster, I dislike the significant premium that the company wants to pay.
Conclusion
At the end of January, DIC Asset AG made an offer for a majority stake in VIB Vermögen. The company wanted to acquire a stake of approximately 51%. The deal should lead to synergies between the companies as VIB has a very strong presence in logistics real estate and has a strong development arm. This will boost DIC’s growth prospects and make it easier to start new funds.
In order to persuade shareholders of VIB to take the offer, the company offered a premium of 35% over the closing price and 94% over the company’s NTA. Management of VIB was not convinced as they said that the deal was uninvited, too low of a premium, and did not reflect the company’s future growth.
In my opinion, DIC Asset is overpaying given the hot logistics real estate market and the low rates in Europe. I am not 100% against the deal though as it could lead to higher growth in the future.