With recent comments likening private equity investors to ‘locusts’ still ringing in the ears, Guy Hands’ Terra Firma has pulled off the largest European private equity deal ever, with the buyout of Viterra from E.ON for €7.1bn.
Given the current political situation, it is perhaps understandable that Terra Firma did not want to make too much of the fact that it had completed the deal without investing any fresh capital of its own. The 82.5% stake that Guy Hands’ firm will acquire in the property company will be funded by refinancing existing portfolio firm Deutsche Annington. The company, which owns a portfolio of about 80,000 former railway workers’ houses, was acquired by Nomura Principal Finance, Hands’ old shop, in December 2000.
The inherent stability of the business, as well as the aggressive nature of the current debt market, has enabled Terra Firma to fund most of the equity portion of the acquisition through balance sheet restructuring. Citigroup Property Investors has stumped up €300m to buy the remaining stake.
All this was achieved by structuring a complex two-step debt financing. In outline, a consortium of banks led by Citigroup and including mandated lead arrangers Barclays Capital, HypoVereinsbank, Eurohypo, SGCIB and RBS, has delivered about €6bn in acquisition finance, including existing debt, to finance the purchase of Viterra.
Separately, Citigroup, Barclays Capital and Helaba structured a leveraged recap of Deutsche Annington, which also financed the equity portion of the deal.
A spokesperson for Terra Firma indicated that there were potential synergies to be had from merging the two businesses. “E.ON is an energy company not a property management firm,” the spokesperson said. “By acquiring these assets in combination with our existing portfolio, we can drive efficiencies and continue to create value by continuing our successful policy of selling flats to existing tenants.”
The deal represents the largest of a series of private-equity backed transactions in the German real estate sector. US private equity firm Oaktree Capital was recently granted exclusivity to buy the 21,000-home Gehag portfolio from Hamburg-based Landesbank. Earlier this year, ThyssenKrupp approved the sale of the Residential Real Estate group for €2.1bn to a consortium comprising real estate funds of US bank Morgan Stanley and Corpus-Immobiliengruppe.
The largest private equity deal of last year was also in German property. This time, US-based Fortress Investment Group beat competition from Terra Firma to buy Gagfah, the real estate business of the federal insurance organisation, for US$4.5bn. Also in 2004, the Berlin local government agreed to sell property association GSW Group to a consortium of investors led by Goldman Sachs and Cerberus for US$2.4bn.
According to Thomson, the five largest private equity deals in the German property market have a combined value of over US$21bn, but the story does not end there.
The German state of Hesse has appointed PricewaterhouseCoopers and CB Richard Ellis to initiate a sale of its €800m (US$1012m) valued property portfolio. Elsewhere, Nileg, the 30,000 strong property arm of Landesbank NordLB, is in the final stages of an auction process and the
city of Hamburg is also rumoured to be seeking buyers for its 40-50, 000 strong portfolio.
Oliver Felsenstein, who led the team at Lovells, the law firm that acted for Terra Firma, said that those with an existing presence would have the advantage. “Cerberus, Fortress and Terra Firma will be in the driving seat to continue the consolidation because of the scale advantages in having existing portfolios,” he said. “There are few competition concerns because even the combined Annington/Viterra portfolio has less than 10% market penetration.”