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15 December 2000

Nomura International's Principal Finance Group (PFG) signs largest ever private equity deal in Germany

Nomura International is delighted to announce that the acquisition of 114,000 German railway worker flats by a consortium, in which PFG has a 55% share, has been signed.

PFG was represented in the consortium by Deutsche Annington Immobilien GmbH with the rest made up of various state development companies and WCM. Deutsche Annington is acquiring 64,000 of the flats for DM4.1 billion. The total purchase price is DM7.6 billion. Guy Hands, Managing Director of PFG, said:

“We are naturally delighted with this acquisition. Having established a successful track record in the UK and the USA, Deutsche Annington takes us into Continental Europe in a substantial way for the first time and makes PFG a truly international business. With the support of PFG’s office in Frankfurt, we believe that Deutsche Annington will be as successful as its sister company in the UK, Annington Homes. Furthermore, there is no reason why Germany cannot be as important to PFG as the UK.”

David Pascall, Managing Director of Principal Finance Group GmbH, said:

“This is the largest ever private equity transaction in Germany and lays the foundation stone for our long-term involvement in Germany.”


About PFG

Set up in 1994 by Guy Hands as a private equity specialist within an investment bank, PFG is unlike the vast majority of private equity funds. PFG's investment strategy has been based on investing in asset based companies with a focus on serving large numbers of customers. Often these are businesses with undervalued assets and people but with reliable cash flows. PFG therefore has not joined the rush to invest in technology based companies in the past three years. It has achieved exceptional returns doubling the amount of money invested and producing a rate of return in excess of 50%.

Again, unlike typical private equity funds, PFG's investment philosopny has been based on growing companies through investment rather than stripping out costs. It has achieved particular success with complex government privatisations where companies have required restructuring and sensitive political and social management. For example, in the UK it has invested in a newly privatised train company (Angel Trains) and acquired the 57,000 unit married quarters estate from the UK Ministry of Defence in 1996 for £1.7 billion (Annington Homes).

The sale of the German railway worker flats to the consortium in which PFG has a 55% share is a similarly complicated deal that takes PFG into Europe for the first time. PFG now has 60 people combining some of the most successful managers of companies of the last 20 years with experts with key financial skills. Background to Privatisation of Railway Worker Flats.

Deutsche Annington GmbH was formed and financed by Nomura International's PFG in 1997. The privatisation process of the railway worker flats in Germany began in 1997 and the announcement was originally scheduled for mid 1998. The sale of the properties has spanned two German Governments and four Transport Ministers.

The initial bid process was awarded to a consortium of German companies (leading participant: WCM) for DM7.1bn, well below Deutsche Annington Immobilien GmbH’s original offer of DM8.1bn, despite identical other conditions. The Railway Workers’ Union strongly opposed the sale both in public and in the courts and it was postponed until after the general election in October 1998. The Social Democratic Party, which was voted in at the election, decided to go ahead with the sale, claiming that the agreement with WCM was binding. The unions continued their objections with two arbitration hearings and an injunction.

In December 1999, Mario Monti, European Competition Commissioner, warned the German Transport Minister that accepting the lower bid could constitute illegal state aid to German companies. Following this intervention, the German Government reopened the bidding process. After much negotiation, and over three years after the process first began, the German Government decided to sell the properties to a new consortium led by Deutsche Annington Immobilien GmbH.

Novel Aspects of the Privatisation

The sale of the rail workers homes is the first large scale privatisation of real estate to take place in Germany. 

The decision to privatise through a sale to the private sector, rather than through an IPO, is also a first by the German Government.

It is thought to be the largest private equity deal ever in Continental Europe.

The sale paves the way for similar privatisations in the future as, even after the deal, the German Government remains the country’ largest property owner.

In the wider context of European regeneration, it was highly significant that the properties have been sold to a consortium led by a foreign buyer. This, too, is a first for a public sector entity in Germany.

Amongst other things, the sale could be said to fulfil two specific political objectives for the German Government.

By buying the properties, Deutsche Annington Immobilien GmbH is acting, in part, as a conduit for increasing home ownership amongst the current tenants. Over time, the tenants will be given the option to acquire their own homes, on the basis that, for many tenants, mortgage repayments would equate to or only be slightly higher than rental payments.

It releases significant amount of capital the Government had tied up in the railway workers houses and flats.

This transaction demonstrates the significant benefits that the use of Principal Finance brings to wider Government by providing an additional route to freeing capital and raising money. This extra route is particularly valuable when the assets/company being privatised are not attractive to the equity markets. The ability of Government to spend the raised money on repaying debt, reducing taxation or internal investment provides it with an additional economic weapon. This is likely to become increasingly pertinent for countries which are members of the single European currency.

The regulatory structure as defined in the privatisation contract is unique. The properties are defined as social housing and it was on the basis that the social nature of the portfolio would remain protected, that the German High Court ruled in June 2000 that the flats could be privatised. The contract therefore includes severe restrictions on raising the rents, selling the flats to third parties or decreasing maintenance costs under a pre-defined level. The social character of the portfolio will be retained in law for at least fifteen years. Tenants will have security of tenure for life and the jobs of the current property portfolio managers have also been safeguarded for twenty years.

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