3 Business Combinations

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, (“Hembla”) via its subsidiary HomeStar InvestCo AB, Stockholm, Sweden, (“HomeStar”) with the funds advised by Blackstone Group Inc. The parties 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 on 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.

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. Furthermore, after announcing the offer, HomeStar acquired additional Hembla shares apart from this offer in the period leading up to December 31, 2019.

Since the acquisition of the shares 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.

Therefore, Vonovia became the owner 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, through its wholly owned subsidiary HomeStar, Vonovia 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. (CET) in order to give remaining shareholders who had not accepted the offer the possibility of doing so.

The second acceptance deadline extended as part of the purchase of Hembla ended on January 8, 2020. During this acceptance period, the offer was accepted by additional shareholders of Hembla, who held a total of 1,204,821 Class B Hembla shares, representing approximately 1.0% of the total voting rights and approximately 1.3% of the share capital.

In addition, a further 242,333 Class B shares had been acquired on the market by June 30, 2020.

Since the acquisition of the shares 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.

Therefore, through its wholly owned subsidiary HomeStar, Vonovia holds 6,136,989 Class A shares and 82,729,580 Class B shares as of June 30, 2020, representing approximately 96.4% of the total voting rights and approximately 95.6% of Hembla’s share capital.

As part of the squeeze-out that was applied for and initiated on December 18, 2019, the arbitration panel was established in the course of the first six months of 2020 and the authorized representative of the minority shareholders (“trustee”) was appointed. 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 a consequence, the shares are fully attributable to the Group as of June 30, 2020. The delisting of the Class B ordinary shares in Hembla was confirmed by Nasdaq Stockholm on December 19, 2019, and the last day of trading was set as January 10, 2020.

As part of the purchase price allocation, the consideration transferred for the business combination comprises the following:

In this context, the 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”).

Embedded derivatives were identified within Hembla’s loan agreements in the form of termination options that can be exercised subject to previously stipulated conditions (payment of an exit fee). In accordance with IFRS 9 B.4.3.5 (e), an analysis was performed at the time of acquisition of the underlying loan agreements to determine whether the embedded termination options should be measured and recognized separately from the corresponding loan agreement.

In some cases, separate measurement and recognition had to be performed in respect of the termination options, as there was a significant difference between the exercise price of the option concerned and the carrying amount of the underlying loan.

In such cases, the termination options were measured at fair value.

The existing interest rate derivatives at Hembla are also measured at fair value, pursuant to IFRS 9.

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

Compared with the provisional allocation as of December 31, 2019, additional embedded derivatives in the form of termination options amounting to € 78.2 million were also recognized. Inversely, deferred tax liabilities of € 16.1 million were recognized. Goodwill was reduced by € 62.1 million in comparison as a result. The corresponding prior-year figure was adjusted as of the date of first-time consolidation.

The goodwill represents synergies arising from the future cooperation between the Hembla Group and Vonovia, particularly those connected with the shared administration and management of Vonovia’s Swedish portfolios, and from the partial transfer of Vonovia’s business strategy, particularly regarding its property and portfolio management strategy, the utilization of modernization know-how, and the Value-add strategy with a focus on expanding the value chain.

Acquisition of Bien-Ries GmbH

On March 5, 2020, Vonovia SE announced that it had signed a contract concerning the acquisition of all shares in Bien-Ries GmbH, Hanau, Germany (“Bien-Ries”), via its wholly owned subsidiary Deutsche Annington Acquisition Holding GmbH.

The acquisition date on which Vonovia SE obtained control of the Bien-Ries Group is April 2, 2020. 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 part of the provisional purchase price allocation, the consideration transferred for the business combination comprises the following:

The contingent consideration relates to the scope and completion date of a development project, which remain uncertain at the current time. The value recognized for the contingent consideration corresponds to its fair value on the acquisition date.

The provisional allocation of the total purchase price to the acquired assets and liabilities (PPA) of the Bien-Ries Group as of the date of first-time consolidation is based on the financial statements of the Bien-Ries Group as of March 31, 2020, and on the known necessary adjustments to the fair values of the assets and liabilities.

Pro rata land and development projects intended for sale but not yet certified are recognized as inventories. The valuation of these development projects is based on the fair value determination as of March 31, 2020, which was carried out by CBRE on behalf of Vonovia. Furthermore, the estimated completion costs and the current project progress were used for the measurement of the already certified development projects. The value of contract assets pursuant to IFRS 15 was determined on this basis.

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:

The goodwill represents synergies from the future integration of the Bien-Ries Group, particularly due to the utilization of development process know-how and the optimization of cost structures.

Since April 2020, the Bien-Ries Group has recognized income from the disposal of real estate inventories (Development) in the amount of € 19.4 million, as well as an earnings contribution in terms of earnings before fair value adjustments of investment properties, depreciation and amortization, interest and taxes (EBITDA IFRS) of € 0.4 million. If the Bien-Ries Group had already been fully included in the consolidated Group as of January 1, 2020, it would have contributed to income from the disposal of real estate inventories (Development) in the amount of € 23.4 million and to EBITDA IFRS in the amount of € -7.0 million.

The gross carrying amount of the acquired trade receivables was € 21.8 million. In particular, this figure includes contract assets pursuant to IFRS 15. Due to the contractual terms in the development business, no separate impairment losses are to be recognized on the corresponding receivables, meaning that the gross amount matches the fair value.

In the 2020 fiscal year, transaction costs related to the acquisition of the Bien-Ries Group in the amount of € 0.9 million were recognized in other operating expenses affecting net income.