M&A in Real Estate: The Value and Effect of Synergies in Castellum's Acquisition of Norrporten

Eirik Wabø Arnesen & Oscar Thøger Maltesen

Student thesis: Master thesis


This thesis investigates listed Castellum AB’s acquisition of pension-fund owned Norrporten AB, announced 13th of April 2016, marking the largest real estate transaction completed in the Nordics since 2008. According to public announcements made by Castellum, the transaction price was equal to the inherent net asset value of SEKm 13,400, implying that Castellum only paid for the underlying property values without any form of control premium or sharing of the synergy value with the seller, targeted to be SEKm 150 p.a. in total. To investigate how the consideration paid compared to the estimated value of Norrporten including synergies, it was necessary to cover theory and historic practice in M&A transactions, a thorough strategic analysis as well as a bottom up valuation. The valuation of both companies, based on the strategic analysis, is a net asset value (NAV) estimation including extensive calculation of cap rates based on 9,000 market observations. The estimated NAV was additionally adjusted by applying relative valuation methods. To cover the full value of the transaction, it was also necessary to estimate the realistic size of the synergies as well as its present value. Firstly, empirical research and comparable companies and transactions was used as references to benchmark the size of the synergies, and thereafter multiple methods were applied in valuation of the synergies. When valuing the firms individually the fair market value of the equity of Castellum was estimated to SEKm 22,391, and Norrporten’s fair market value of equity was estimated to SEKm 11,999 indicating that Castellum’s consideration reflected an overprice of SEKm 1,400. However, taking into account the estimated value of synergies of SEKm 2,369 the acquisition is accretive for Castellum with SEKm 969, and 51% of the overall value of synergies was shared with the sellers. 51% is a high share compared to empirical research indicating an average of 35% across a range of transactions, with the highest scores observed for globally operating businesses, and not local real estate companies like Castellum or Norrporten. The authors concluded that an acquisition of Norrporten is the right strategic move for Castellum, as the companies have a geographic and segment overlap, which allows consolidation of asset management functions and as the companies have complimentary capabilities. However, the consideration paid for such a combination was too high and the overprice paid could be related to hubris or sunk cost fallacy from the Castellum team that had already spent considerable time and money on considering an acquisition of Norrporten over the last 2.5 years. Based on aggregated empirical research, the expected long-term share performance of Castellum should be 10% below benchmark over the next five years, but the authors believe that this is not necessarily correct as long as the synergies are obtained within 12-18 months in which case the transaction would create value for the shareholders.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final ThesisMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2017
Number of pages129