Adler - Of 265s and 975s
All,
Please find our updated analysis here.
While we are not finished incorporating all the news we’ve had over the last couple of weeks, we have been focussing on Adler’s liquidity for the coming quarters under various scenarios, as well as on the assets on whose sale Adler are relying. Ahead of tomorrow’s release of “clarification” of some of the main points in the presentation, however, we feel we can already draw most conclusions.
LEG:
- We think LEG remains interested in the Brack assets. Like its peers, LEG is in a race for size in a consolidating market. Vonovia have just swallowed Deutsche Wohnen and size matters in real estate. Brack’s yielding assets are standard enough and should therefore represent an attractive target.
- LEG also seems to know quite well about the Gerresheimer asset. Its purchase of the two stakes away from Adler, it’s payment for the option to buy Brack, the unwind of the Gerresheimer sale and the reporting of the Q3 figures all seemed tightly choreographed to us.
- The more LEG buys from underneath Adler, the less Vonovia get when one day they might make an offer after all.
- All the above said, LEG did not buy Brack yet. On the one hand that may simply be a matter of plain option theory, where you would not exercise before maturity, on the other LEG may be waiting for something.
1) LEG may be waiting for the now split Gerresheimer to receive at least partial approval before it commits to a price.
2) Or it may be waiting for more scrutiny by authorities or any shareholder action before bringing all that dirt - and ultimately liability - in-house.
Liquidity and the €975m:
- The sale of Brack is key to the predictability of Adler's liquidity. It is true that the liquidity plan provided last week allows Adler to do without it, but it would amount to a tremendous acceleration of disposals, which is difficult to rely on.
- If Adler sell Brack, then our analysis suggests (in fairness, as does the presentation) that further asset sales are required - approximately of half the volume indicated.
- Overall, a study of the assets apparently making up the key components of the €975m of H222 asset sales (on Page 6 of the presentation) suggests that the assets could indeed carry that value, although the wording in the fourth block on page 18 sheds doubt on that. This will be a key focus in Adler’s release tomorrow.
Raid, ADO, Vonovia:
- We remain concerned that in the short term a raid of Adler’s offices remains a distinct possibility. It would shatter securities prices even more.
- It seems Adler’s strategy is to liquid ARE and focus on ADO, by selling as much of Consus as possible and keeping only the most “difficult to sell” and spooning that soup out over the next years themselves.
- Vonovia have stepped back from the lime light, having publicly declared not to be interested in a take-over in the near term. In the current environment that makes perfect sense, but it may also have something to do with the large share of the stock that is still under the control of parties close to Cevdet Caner, who many not be a willing seller at these prices.
Upstream Intercompany Loans of €265m:
- We expect the company to also address the upstream intercompany loan that a subsidiary of ARE seems to have passed up to Adler Group, where it appears to constitute very much the entire cash balance at year end.
- An upstream loan of this kind naturally represents a loss to ARE investors and a gain to ADO investors.
- The reflection of the loan in ARE’s year-end accounts came as a surprise, as the press release was made only in March. Also, there are difference in the numbers. For lack of detail, we have not pursued this avenue any further, but acknowledge the delicate nature of the situation.
Positioning:
- We are holding on to our positioning, but must concede that while the Consus 22s are too illiquid (and of course the most short term) to merit selling at all, we have suffered significantly on our recent 2% share purchase in Adler at €9.50. So far the initially small position has become even a lot smaller. We had admittedly misjudged the extent of the KPMG revelations.
- From here, we may be waiting until the risk of a raid recedes or until we have news from LEG - one way or another. Adler has sufficient liquidity to make it through September 30th to afford us this time. With a Vonovia bid off the table for the time being, there should be little to propel securities until LEG decide to exercise their option.
- We will be discussing Aggregate separately.
Happy to discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003