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Activist Hedge Fund Urges Aareal to Weigh Software Unit Sale

Nishant Kumar and Stephan Kahl

(Bloomberg) -- Activist hedge fund Teleios Capital Partners called on German lender Aareal Bank AG to look into selling its software unit.

Teleios, which owns about 3.4% of commercial real estate lender Aareal, said the software unit Aareon is a very different business than its parent, and without separate ownership it’s “in danger of failing to achieve its full potential.” The hedge fund made its case to the Aareal board in a Sept. 26 letter seen by Bloomberg.

Aareal shares rose as much as 4.9% on the news.

The bank’s current preference to hold on to Aareon and potentially partner with a strategic minority investor isn’t in the interest of shareholders, Teleios said. The hedge fund estimates that Aareon’s standalone valuation could be as much as 60% of the market capitalization of Aareal. Teleios called for a strategic review.

“It seems obvious to us that an innovative and fast-growing software business would benefit vastly from different leadership and oversight, incentive schedules, and corporate and risk cultures -- removed from a conservative and stagnating commercial real estate lender,” Teleios partner Adam Epstein wrote in the letter.

‘Strategic Options’

Aareal spokesman Christian Feldbruegge confirmed that the company received the letter from Teleios. “It is the management’s fundamental duty to continually review value-creating strategic options in the interests of all stakeholders,” he said.

A representative of Teleios declined to comment.

Teleios manages about $1 billion. Started in 2013, it focuses on European mid-cap companies. Activist investors take stakes in companies and agitate for changes to help boost share prices.

German banks are streamlining businesses under pressure in an overcrowded market where lenders are grappling with low to negative interest rates and an economy showing signs of weakness. Selling Aareon could help Aareal to deal with weaknesses in its U.K. business where non-performing loans for shopping centers have been piling up.

Aareal has “substantial exposure” to the U.K. commercial real estate market and could be “hit hard” by a no-deal Brexit, Moody’s Investors Service said in a report in March.

In the letter, the hedge fund flagged its meeting with the bank earlier this month and said the board is aware of third parties interested in the software division.

“It seems logical to us that the vast majority of these potential bidders would prefer to own Aareon outright, and be willing to pay a premium valuation for control,” Epstein wrote.

(Updates with Aareal comment in sixth paragraph.)

To contact the reporters on this story: Nishant Kumar in London at nkumar173@bloomberg.net;Stephan Kahl in Frankfurt at skahl@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, Patrick Henry

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