Cash Settlement Of Deutsche Wohnen Convertible
Feb 02, 2016 AM CET
VNA.DE - Vonovia SE
Cash Settlement Of Deutsche Wohnen Convertible
Feb 02, 2016 / 11:00AM GMT
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Corporate Participants
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* Stefan Kirsten
Deutsche Wohnen - Management Board
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Conference Call Participants
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* Marc Mozzi
Societe Generale - Analyst
* Simon Waxley
Whitebox Advisors llc - Analyst
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Presentation
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Operator [1]
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Ladies and gentlemen, welcome to the Vonovia SE conference call. At our customer's request, this call conference will be recorded. As a reminder, all participants will be in listen-only mode and, after the presentation, there will be an opportunity to ask questions. (Operator Instructions) May I now hand you over to Dr. Stefan Kirsten, who will lead you through this conference. Please go ahead, Stefan.
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Stefan Kirsten, Deutsche Wohnen - Management Board [2]
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Thank you very much. Ladies and gentlemen, good evening and thank you for taking the time to join us on such a short notice for another conference call. I know we are conflicting also with one of our European competitors and I appreciate a lot that this transaction has taken up a lot of your time already. So we feel today's topic warrants your attention, but I hope that we can make it relatively brief.
Deutsche Wohnen's surprise convertible announcement on 29 January created unnecessary investor confusion and uncertainty. We therefore believe that it is important to be crystal clear and to explain to you the legal facts underlying our position with regard to the treatment of the convertible bond tender commitment and our offer for Deutsche Wohnen.
When we designed the offer structure, we included something similar what we have had already done successfully in our [Gastro 2014] offer. A feature that allows convertible holders to support the transaction, but providing us with a tender commitment that counts against the minimum offer threshold.
On December 2 last year, Deutsche Wohnen announced that, in case of a successful offer, they intend to settle the outstanding convertible bonds and shares, which is, by the way, economically the rational behavior and decision for convertible bonds that are deep in the money. And we are therefore treated like equity from a financial analysis point of view, and by the way also, by Deutsche Wohnen.
Last Thursday, however, Deutsche Wohnen apparently had a change of mind, and out of the blue announced that they reconsider, I am quoting that deposition, creating uncertainty for those of their investors that had made investment decisions based on the 2 December statement. While Deutsche Wohnen only reserved the right to cash settle, they made it clear that they might want to use the cash settlements for the primary reason to disallow tender commitment from counting against the minimum acceptance threshold of our offer. As such, their announcement created a lot of irritation as investors were trying to understand what the real impact of this announcement could be.
By the way, we were puzzled, too.
However, instead of drawing investor support away from the offer, as may have been Deutsche Wohnen's intention, equity as well as convertible when the investors of Deutsche Wohnen reached out to us, the investors that have given us tender commitments reiterated their continued support and confirmed their understanding that their tender commitments would continue to count against the [acceptance] threshold, not least because as I mentioned before, we were also puzzled by Deutsche Wohnen's somewhat halfhearted approach.
Why would they not offer a cash settlement right away, if they are so certain about their case? We investigated this matter (technical difficulty) over the last few days and have come to a very clear conclusion. And the conclusion might also help to explain why Deutsche Wohnen so far only reserved their thinking on the matter, but did not yet come out with a final and definitive answer.
Ladies and gentlemen, there is no basis under the terms of the conditions of the 2013 and 2014 convertible bonds to exercise the cash settlement option in the given circumstances. The terms and stipulate that, in a case of cash settlement, or in the case that this option is exercised, the amount due to the repayment of delivery of shares must be determined over a period of 15 and 20 consecutive trading days, respectively.
In the given circumstances, this determination period would, however, only end after the repayment date. The cash amount payable by Deutsche Wohnen on the repayment dates cannot therefore be unambiguously determined. The resulting ambiguity operates to the detriment of Deutsche Wohnen as an issuer of the convertible bonds. The exceptional cash settlement option is thus unavailable for Deutsche Wohnen. Deutsche Wohnen remains obliged to deliver shares.
So how does that rather complex matter go into practical terms? A, the cash settlement option cannot be validly exercised in the current situation because the cash settlement amount cannot be determined, and more importantly, B, we will therefore take the tender commitment of convertible bond holders fully into account for the purpose of calculating the minimum acceptance threshold.
So the bottom line is this. The last announcement by Deutsche Wohnen was not only factually misleading. No, but the optionality they try to claim with their announcement is simply not available as a matter of law. What does that mean for the offer?
First and foremost, everything remains unchanged and we can reconfirm and reiterate that all convertible tender commitments received already -- and you have seen that this is 5.3% of the shares outstanding as of this launch time, and received until the end of the acceptance period, will definitely come out of counts for the purpose of the minimum acceptance threshold. The Vonovia management team continues to remain as convinced as ever that the combination of the two companies is the right strategic step forward, and that despite the numerous maneuvers by Deutsche Wohnen's management to try to confuse investors and introduce uncertainty to the offer we will ultimately get the required support for our offer to be successful.
I would like to make you all aware of the deadlines again. It is 9 February, next Tuesday, midnight Central European Time. And let me tell you that as of now, out of the top 10 investors in Deutsche Wohnen, the vast majority has already committed to support us in this matter.
Ladies and gentlemen, this concludes my remarks and I would like to answer any questions arising. Jerry, if you could please take over.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Marc Mozzi, Societe Generale.
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Marc Mozzi, Societe Generale - Analyst [2]
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Thank you for your call. I have only two questions. The first one is by saying that you have now the top [controllers] of Deutsche Wohnen's 14-year offer, can we have an update on the amount of capital including the shares you have been buying back on the market where I guess you now have 5%, that [represents]. That's my first question.
And the other question is, do I understand correctly that in fact the threshold, including the convertible bond, is 44%? And if I do the math correctly, all the bondholders, [convertible bondholders], do represent about 12% of the overall shareholder structure, which would mean on a 50% basis, threshold, [long dated debt], this represents 24%.
So technically speaking, if you already have 20% plus 24% of correctable bond holding you have already reached your 44% threshold. Am I correct in [seeing that way]? Thank you.
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Stefan Kirsten, Deutsche Wohnen - Management Board [3]
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No, on the second one I don't think you are correct. Because we have now 5.3%, the commitment. You are right (technical difficulty) total to be approximately 12%. You never get a total, but I am sure that we get a large majority. We are still counting against the 50.1% on an undiluted basis. We have the benefit that we can count the convertible holders as strikes against that. And can you just quickly remind me what was your first question, because I can't make any notes. I am sitting in a car in a parking lot.
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Marc Mozzi, Societe Generale - Analyst [4]
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Including your support of shareholders -- top 10 shareholders (multiple speakers)
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Stefan Kirsten, Deutsche Wohnen - Management Board [5]
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Yes, it is the majority of the top 10 shareholders. It is not all of them. You know that a couple of them were also vocal that there was not tender, but we got the vast majority and that gives us, of course, confidence that we are on a positive move.
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Marc Mozzi, Societe Generale - Analyst [6]
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Brilliant, thank you very much.
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Operator [7]
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(Operator Instructions) Christie Groves.
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Simon Waxley, Whitebox Advisors llc - Analyst [8]
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It's actually [Simon Waxley], who works for Christie. What is the legal position here? Do you just continue as if you are correct legally and, then, the condition hopefully from your perspective, the condition is met taking into account your legal position as far as the convertible bonds? And what happens -- I mean, is this challenge? -- in fact, do you have to get approval from [Baffen] to basically proceed on your own understanding? I am just trying to understand how this process is going to work over the next week.
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Stefan Kirsten, Deutsche Wohnen - Management Board [9]
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Okay, from my point of view, it's relatively simple because this is an offer which we are making to the shareholders of Deutsche Wohnen. So that is very direct and to the -- and, of course, through a tender commitment agreement to the convertible bond holders. So that is a very direct contractual situation. With regard to Baffen, whether or not Deutsche Wohnen has a cash settlement option is not a takeover law question. But it's a question about the terms and conditions of the governing law of the convertible bonds. So Baffen would only come in if there was a violation of takeover law.
So they might be looking whether or not the Deutsche Wohnen answer on Friday constitutes a frustrating question or a frustrating action, but there is no need for them to scrutinize the convertible issue so because, for us, it's clear that Deutsche Wohnen have to deliver the shares. So, under all circumstances, we feel very safe with our legal opinion that we can count the tender commitment agreements against the threshold.
Is that answering your question?
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Simon Waxley, Whitebox Advisors llc - Analyst [10]
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Yes, so you can basically, at the end of this period, say, okay, we are successful, not successful. Assuming you are successful, then you can demand the shares and then ultimately it is your issue is the shares are not delivered to you, that is a separate litigation issue.
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Stefan Kirsten, Deutsche Wohnen - Management Board [11]
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Well, that would be a different story. I must actually say I am personally not a lawyer. But it sounds right to me, but I would not commit too much to that statement, as a nonlawyer. Okay?
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Simon Waxley, Whitebox Advisors llc - Analyst [12]
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Okay. Just one last point as well. It sort of makes sense for convertible bondholders to tender their bonds just from an economic perspective. Is that your expectation? You said the majority. I mean, I would've thought the vast majority. Would you say that's correct?
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Stefan Kirsten, Deutsche Wohnen - Management Board [13]
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I would say all the people I've talked to are economically very sound in their decision-making. So I am expecting most bondholders to go into tender commitment agreements and to convert.
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Simon Waxley, Whitebox Advisors llc - Analyst [14]
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Thank you.
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Operator [15]
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(Operator Instructions) As we have no questions at this time, I will return the call to Stefan for closing comments.
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Stefan Kirsten, Deutsche Wohnen - Management Board [16]
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Thank you, Jerry. Okay, let's make it brief.
The cash settlement option cannot be a valid exercise for Deutsche Wohnen. We will therefore take the tender commitment agreements which we (technical difficulty) in the tender commitment agreements which we are intending to get against the minimum acceptance threshold. Once we do that, this will enable our offer to have a higher probability to go through. We are very confident. We are looking forward to next year Tuesday.
Thank you very much for attending this call and I do sincerely hope that you have no more confusing news from any of the parties. Thank you very much. Have a good night.
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Operator [17]
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This now concludes our call, ladies and gentlemen. Thank you for attending. You may now disconnect.
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