Executive summary - Udo Bullmann

Viterra1. Company descriptionViterra is a residential property company that was owned by E.on and had a stock of 150 000 housing units. E.on isGermany’s largest energy group. Its areas of activity are electricity generation and distribution and the sale of naturalgas to households and businesses. In recent years, E.on had been tidying up its portfolio of companies, hiving off theparts of the group that were not in the energy business, including Viterra.2. Economic and social effects2.1 Private equity fund descriptionDeutsche Annington, a subsidiary of the British private equity investment firm Terra Firma, acquired E.on’s propertysubsidiary Viterra with its entire stock of 150 000 dwellings for seven billion Euros in May 2005. At that time thedeal was the biggest ever residential property transaction in Europe. The purchase made Viterra the largest Germanproperty company at a stroke. By now it has 230 000 housing units in Germany.E.on made a profit of €2.4 billion from the sale. The purchase price included €3 billion for the assumption of netliabilities and reserves; the remaining amount of €4 billion was for the acquisition of equity.2.2 Debt structure, alteration of company capital management fees requested by LBOAccording to the German edition of the Financial Times, 90% of the purchase was made with debt capital – anunusually high percentage for purchases of stakes in companies. The fact that interest rates were at one of theirlowest points ever was conducive to the high leverage ratio. The loans were made available by the Citigroupfinancial services company. As part of the deal, it acquired a minority stake of about 17.5% in Annington through itssubsidiary Citigroup Property Investors. According to official statements, Citigroup intended to support the growthof Annington in collabouration with Terra Firma.The private equity firms Fortress and Cerberus had been interested in acquiring Viterra but had bid only €6 billion.The reason why Terra Firma and Deutsche Annington were able to make such a high offer was evidently that theCitigroup investment bank had arranged debt financing on quite reasonable terms.2.3 Effects on job creation, investments in training and education of labour force, investments ininnovationBefore the deal, Deutsche Annington had 400 employees. The purchase of Viterra added a further 1 500. The plan isnow to offload a total of 500 of these employees, in other words more than a quarter of the entire staff. Anningtonand E.on had not negotiated any employment guarantees for the Viterra workforce.2.4 Corporate governance and economicsE.on’s shareholders want to benefit from the successful sale in the form of a special dividend. Wulf Bernotat,chairman of the E.on board, on the other hand, wants to use the billions for investment purposes. Observers assume,however, that the board will bow to the wishes of its investors. As in the case of Deutsche Börse AG, the tradingname of the Frankfurt Stock Exchange, this clearly illustrates that German managers will need to learn to live withthe fact that shareholders will exert far more influence on corporate strategies than has been customary in the past.