4 Business Combinations

All in all, and including Vonovia SE, 620 companies (Dec. 31, 2018: 520) – thereof 294 (Dec. 31, 2018: 318) domestic companies and 326 (Dec. 31, 2018: 202) foreign companies – have been included in the consolidated financial statements as of December 31, 2019. In addition, joint activities were performed with two domestic companies (Dec. 31, 2018: two). In addition, four (Dec. 31, 2018: four) domestic companies and one (Dec. 31, 2018: two) foreign company were included as joint ventures and two (Dec. 31, 2018: two) foreign companies were included as associated companies valued using the equity method.

For all subsidiaries included in the consolidated financial statements, the reporting date is December 31.

The list of Vonovia shareholdings is appended to the Notes to the consolidated financial statements as an integral part thereof.

Companies that have made use of the exemption provision set out in Section 264 (3) of the German Commercial Code (HGB) are marked accordingly in the list of shareholdings.

The changes as of December 31, 2019 in comparison to the prior year result from the acquisition of the Hembla Group (123 companies) and 20 further acquisitions, four newly established companies, 36 mergers, eight liquidations and one disposal due to a loss of control. Three foreign companies are no longer included in the scope of consolidation as they are no longer considered to be material. These companies are not shown as consolidated affiliated companies.

Acquisition of Victoria Park

As of December 31, 2019, the final purchase price allocation using the anticipated acquisition method and the consideration granted is unchanged as against December 31, 2018. The measurement period for the first-time recognition of the merger with Victoria Park ended on June 30, 2019.

The call options granted to Deutsche Annington Acquisition Holding GmbH during the original offer period were exercised on May 15, 2019. The call options include 10,235,198 class A shares and 14,264,946 class B shares, which corresponds to 10.0% of the total number of shares and 12.5% of the total voting rights in Victoria Park. The exercise price of the call options was the same as the price paid in the public takeover offer for the shares in Victoria Park. Vonovia therefore held 91.4% of the share capital and 94.4% of all voting rights in Victoria Park.

As this resulted in Vonovia holding more than 90% of the voting rights, Vonovia asked the Board of Directors of Victoria Park to initiate a squeeze-out for the acquisition of all remaining shares in Victoria Park in line with the Swedish Companies Act (sv. aktiebolagslagen (2005:551)). The Board of Directors then also resolved to apply for delisting of the Victoria Park ordinary shares of class A and class B from Nasdaq Stockholm. The last day of trading was June 18, 2019.

Once the squeeze-out process has been initiated, Swedish law dictates that it can no longer be aborted unilaterally by one of the parties. As part of this process, the transfer of the majority of the outstanding shares in rem was executed with the granting of the advance title on November 17, 2019. As a consequence, the shares are fully attributable to the Group as of December 31, 2019, and are recognized accordingly.

In addition, a resolution on the recall of all 1,032,047 preference shares was passed at the extraordinary Annual General Meeting of Victoria Park AB (publ), Malmo, Sweden, held on June 19, 2019. The recall was conducted in accordance with Section 5.4 of the Articles of Association on July 11, 2019.

Acquisition of Hembla

On September 23, 2019, Vonovia SE announced that it had signed a contract for the purchase of 69.3% of the voting rights and 61.2% of the share capital in Hembla AB (publ), Stockholm, Sweden, via its subsidiary HomeStar InvestCo AB, Stockholm, Sweden, with the funds advised by Blackstone Group Inc. The parties have agreed to a purchase price of SEK 215.00 per share (irrespective of share class). The completion of the transaction required the approval of the Swedish merger control authorities, which was given on November 5, 2019.

The acquisition date at which Vonovia SE obtained control of the Hembla Group is November 7, 2019. This was the date on which the offer was settled. This transaction shall be treated as a business combination in accordance with IFRS 3.

As a result of the transaction, Vonovia became the owner of 6,136,989 Class A Hembla shares and 50,722,985 Class B Hembla shares. Together with the 2,805,588 Class B Hembla shares acquired on the market up to that time, this corresponded to 71.7% of the voting rights and approximately 64.2% of the share capital.

On November 8, the offer document submitted on November 7, 2019, for the acquisition of all outstanding Class B Hembla shares not already held by HomeStar was approved and registered by the Swedish Financial Regulator. The offer price was SEK 215.00 per share. The acceptance deadline for the offer ended on December 9, 2019, at 5 p.m. (CET); the transaction was completed on December 16, 2019. Since the acquisition of the shares as part of the acceptance period was effected under exactly the same conditions as the purchase on November 7, 2019, and the two events are related in terms of content and timing, a linked transaction can be assumed.

As a result of the completion of the transaction, Vonovia became a holder of 24,746,662 Class B Hembla shares, corresponding to approximately 21.1% of the voting rights and approximately 26.6% of the share capital of Hembla.

Furthermore, since announcing the offer, HomeStar has acquired an additional 3,007,191 Class B Hembla shares apart from this offer, corresponding to approximately 2.5% of the voting rights and approximately 3.2% of the share capital of Hembla. Since the acquisition of the shares was effected within the acceptance period under exactly the same conditions as the purchase on November 7, 2019, and the two events are related in terms of content and timing, a linked transaction can be assumed.

Therefore, Vonovia became holder of 6,136,989 Class A Hembla shares and 81,282,426 Class B Hembla shares as of December 31, 2019, representing approximately 95.3% of the voting rights and approximately 94.1% of the share capital. In addition, HomeStar has acquired a total of 2,253,600 option rights from Hembla employees, which were granted as part of Hembla’s long-term incentive program in 2017.

On December 10, 2019, Vonovia announced that it would extend the offer period until January 8, 2020, at 5 p.m. (CEST) in order to give remaining shareholders who had not accepted the offer the possibility of doing so.

Furthermore, on December 18, 2019, Vonovia asked the Board of Directors of Hembla to apply for a delisting based on the existing share of voting rights of over 90%. The Board of Directors then applied for a delisting of ordinary shares of Class B in Hembla from Nasdaq Stockholm on the same day. The delisting was confirmed by Nasdaq Stockholm on December 19, 2019, and the last day of trading was set as January 10, 2020.

In addition, on December 18, 2019, Vonovia initiated an application for a squeeze-out to acquire all remaining shares in Hembla after the extended offer period in line with the Swedish Companies Act (Section 22 of the Swedish Companies Act).

As part of the provisional purchase price allocation using the anticipated acquisition method, the consideration transferred for the business combination comprises the following:

Due to the proximity of the acquisition to the reporting date, the allocation of the total purchase price as of December 31, 2019, could only be made on a provisional basis. In this context, the provisional allocation of the total purchase price to the acquired assets and liabilities (PPA) of the Hembla Group as of the date of first-time consolidation is based on the financial statements of the Hembla Group as of October 31, 2019, and on the known necessary adjustments to the fair values of the assets and liabilities.

The valuation of the investment properties is based on the fair value determination dated September 30, 2019, which was carried out by Savills Sweden AB on behalf of Hembla. As no material changes in the market environment were identifiable between September 30, 2019, and the acquisition date, only the quantity structure was adjusted to the acquisition date.

The fair value of the loans was determined as the sum of the amounts of future cash flows discounted to the acquisition date using a DCF method. The contractually agreed maturities and the interest and repayment schedules were used to determine the future cash flows of the loans. The yield curve used in the DCF calculation to discount the cash flows consists of a risk-free base curve and a premium for the risk of non-performance (“risk spread”).

The assets and liabilities assumed in the course of the business combination had the following preliminary fair values as of the date of first-time consolidation:

Goodwill represents benefits from the future cooperation between the Hembla Group and Vonovia through the partial transfer of Vonovia’s business strategy, in particular regarding its property and portfolio management strategy for the administration and management of the residential units, the utilization of Vonovia’s modernization know-how to further modernize the portfolio and the Value-add strategy with a focus on expanding the value chain.

Since November 2019, the Hembla Group has recognized income from property management in the amount of € 30.4 million, as well as an earnings contribution in terms of earnings before fair value adjustments of investment properties, interest, taxes, depreciation and amortization (EBITDA IFRS) of € 6.6 million. If the Hembla Group had already been fully included in the consolidated Group as of January 1, 2019, it would have contributed to the income from property management in the amount of € 181.2 million and to EBITDA IFRS in the amount of € 67.7 million.

Out of the trade receivables that were acquired, an amount of € 1.5 million is likely to have been uncollectible at the time of acquisition. The gross amount of the acquired trade receivables was € 2.2 million. The net carrying amount, which corresponds to the fair value, was € 0.7 million.

In the 2019 fiscal year, transaction costs related to the acquisition of the Hembla Group in the amount of € 11.0 million were recognized in other operating expenses affecting net income. € 9.7 million of this amount was recognized in other operating expenses and € 1.3 million under other financial income.

A total of 123 foreign companies were newly included in the scope of consolidation as of the date of acquisition.