Cologne setback for Terra Firma

Terra Firma’s debut investment, the acquisition of a E1.9bn portfolio of social housing in Cologne, has been pulled, falling victim to political wrangling in the city’s government.

Political turmoil in the City of Cologne has forced Terra Firma Capital Partners to abandon what would have been the first transaction funded by Terra Firma Capital Partners II fund.


Terra Firma, led by Guy Hands, had signed an initial agreement with the City of Cologne government in mid-December to acquire the city’s 68.8 per cent stake in GAG Immobilien, a property manager listed on the Frankfurt and Düsseldorf stock exchanges, and another 10 per cent of GAG’s equity that is currently owned by Cologne City Savings Bank. The deal was valued at a total of just under E2bn.


The transaction comprised 42,000 publicly-owned flats in Cologne. Terra Firma would have invested E300m of equity, alongside another E300m coming from Landesbank Hessen-Thüringen. The remaining E1.3bn would have been provided through debt.


The deal was subject to approval by the government of Cologne. Although favoured by the city’s CDU-led coalition government, the transaction was rejected by one vote on December 19. A second vote was taken in mid-January, only for the proposal to be rejected again.


The reverberations of the decision have been significant. The conservative coalition government was brought down by the decision and has since been replaced by an alliance involving the Green Party which is opposed to the deal. Also, having missed out on revenue that the sale would have generated, the City of Cologne has been forced to make cutbacks in its public services spending.


“The deal fell foul of the uncertain political climate in Germany,” said David Pascall, head of Terra Firma’s German operations. “We’re disappointed that the sale to a responsible purchaser has been rejected. The sale seemed to be an ideal solution to the City’s financial plight.”


Terra Firma had planned to sell a significant proportion of the flats to tenants, a strategy employed when Guy Hands, via Nomura’s principal finance unit, acquired 64,000 railway workers flats in Germany for E2.1bn in 2001.


The deal’s collapse comes as a blow to Terra Firma, which spun out of Normura last year and is currently in the process of raising a E3bn buyout fund. The Cologne deal was seen as sending a positive message to potential investors in the fund, which in October held a first closing on E1bn. A final closing is scheduled for later this year.