Handelsblatt Exclusive

Karstadt in €2.9 Billion Bid for Kaufhof

karstadt kaufhof signs dpa
Karstadt and Kaufhof, Germany's largest retail department store chains, could be combined in a defensive consolidation that would change the country's shopping landscape.
  • Why it matters

    Why it matters

    If Austrian investor René Benko’s bid for Kaufhof is successful, the link-up with Karstadt would create a new retailing giant on Germany’s high street.

  • Facts

    Facts

    • Mr. Benko’s €2.9 billion bid for Kaufhof is close to the price sought by Kaufhof’s owner, the Metro Group.
    • Both Kaufhof and Karstadt are struggling with online rivals and changes in consumer habits and would benefit from a merger, analysts said.
    • Kaufhof’s biggest asset is real estate. The chain owns stores in top locations in big German cities.
  • Audio

    Audio

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The owner of Germany’s Karstadt department store chain, Austrian investor René Benko, has offered €2.9 billion, or $3.23 billion, to buy rival Kaufhof, which is larger in terms of sales, several people familiar with the matter told Handelsblatt.

If successful, Mr. Benko’s takeover of Kaufhof would lead to one of the largest wholesale consolidations in German retailing in recent decades, marrying two of the country’s traditional old-line retailers in a defensive alliance.

The Metro trading group, Germany’s largest listed retailer, which owns Kaufhof, discussed the offer at its supervisory board meeting in early May, the sources said.

 

If successful, Mr. Benko's takeover of Kaufhof would lead to one of the largest wholesale consolidations in German retailing in recent decades, marrying two of the country's traditional old-line retailers in a defensive alliance.

Both Metro and Mr. Benko’s company, Signa-Holding, declined to comment.

It’s isn’t Mr. Benko’s first attempt to buy Kaufhof. His previous offer failed because his bidding price was too low.

In 2011, Mr. Benko bid €2.4 billion, followed by a lower bid of €2.05 billion.

His current offer of €2.9 billion is very close to what Metro has been asking.

Haniel, an old-line German family-owned company that owns 25 percent of Metro, would like to offload Kaufhof because it regards the subsidiary as too risky in the age of rising online sales, which are challenging large storefront retailers such as Kaufhof and Karstadt for sales and customers.

The Haniel family would prefer a cash offer for Kaufhof.

 

German Department Stores Karstadt and Galeria Kaufhof-01

 

The acquisition would merge Germany’s two biggest department store chains, a move that has long been seen as the best way to save both. The retailers have been hit hard by online retailing and the growth of multi-store shopping malls.

A merged Karstadt-Kaufhof would be able to cut costs and pool resources to woo customers. Buying Kaufhof has been on Mr. Benko’s agenda since he purchased Karstadt in 2014. His plan: First, restructure Karstadt, then merge it with Kaufhof to create the definitive German department store chain.

A merger would not be likely to cause antitrust problems because even though Karstadt and Kaufhof are the country’s two biggest high street department store chains, they don’t dominate the country’s retail sector.

Competition from online discounters and traditional rivals such as Peek & Cloppenburg and Hennes and Mauritz of Sweden, is too strong for that.

Metro no longer considers Kaufhof to be a strategic investment.

Kaufhof’s biggest asset is its retail estate.

 

karstadt benko portrait dpa picture alliance
The 38-year-old owner of German department store chain Karstadt, René Benko, is bidding €2.9 billion for its main rival, Kaufhof, in a deal that would transform the country’s traditional retail sector. Source: DPA Picture Alliance

 

The retailer owns 59 of the 119 large-format stores it runs, and many are jewels in top, inner-city locations. The properties alone are valued at well over €2 billion, an attractive prospect for Mr. Benko, who made his fortune in real estate.

The Austrian businessman, who turns 38 today, started out by investing in luxury apartments before buying his first department store in the Austrian city of Innsbruck in 2004. That made his name as a successful retail investor.

Kaufhof’s stores in Cologne, Berlin, Hanover, Frankfurt, Stuttgart and Düsseldorf alone account for 45 percent of the company’s real estate value.

“Those are central locations in Germany’s top cities with attractive growth potential,” said Metro’s chief financial officer, Mark Frese.
He added that Metro isn’t considering selling individual Kaufhof stores.

The retailer owns 59 of the 119 large-format stores it runs, and many are jewels in top, inner-city locations. The properties alone are valued at well over €2 billion, an attractive prospect for Mr. Benko, who made his fortune in real estate.

“We’ll only sell Kaufhof as a whole,” Mr. Frese said.

Metro has been in touch with other potential buyers recently, not least to strengthen its negotiating position with Mr. Benko.

Managers from Canadian retail giant Hudson’s Bay came to Germany for talks on buying Kaufhof; the negotiations are still at an early stage, said company sources.

Hudson’s Bay wants a foothold in Europe. The Canadian group has 322 stores and two years ago bought U.S. chain Saks Fifth Avenue for $2.4 billion.

“There are more potential buyers today than there have been in the past,” Metro Chief Executive Olaf Koch said in February, attributing the growing interest to Kaufhof’s improving performance.

But a closer look at the finances suggests his optimism may be exaggerated.

Kaufhof’s profit fell by almost 27 percent to €115 million in the first half of its 2015 fiscal year. In the second quarter, it lost €24 million.

 

karstadt 1 bags and facade dpa
A marriage of Karstadt and Kaufhof, Germany’s largest department store chains, would be unlikely to raise antitrust objections because the two companies no longer dominate the retail sector. Source: DPA

 

Profit fell significantly more than sales, indicating that Kaufhof has been trying to boost its flagging business with discounts.

The sharp decline in investments at Kaufhof suggests that Metro’s commitment to its subsidiary is waning. In the first half of fiscal 2015, investment came to just €34 million — almost 72 percent less from a year earlier.

Karstadt is struggling too. The chain recently said it would close five more stores by June 2016 at the latest.

Karstadt Chief Executive Stephan Fanderl hopes earnings will recover and said the group may break even in the fiscal 2015, which ends on September 30.

“We must then be in a position in the coming fiscal year to earn money again,” Mr. Fanderl said.

A merger with Kaufhof could help.

The former owner of Karstadt, the German-American investor Nicholas Berggruen, analysed the benefits of a fusion back in 2011.

 

058 Karstadt-NEW

 

The report on “Project Zeus,” as the merger was termed back then, concluded that the bigger group would create profits and synergies in cost reduction, advertising, logistics and increased purchasing power.

Mr. Benko has always agreed with that assessment.

But a merger would likely encounter stiff opposition from employees worried about store closures and redundancies. And the power of German unions to extract generous severance packages could undermine the expected profits from consolidation.

 


Video: The History of Galeria Kaufhof.

 

Florian Kolf is the managing editor of Handelsblatt. Kirsten Ludowig is the newspaper’s retail correspondent. To reach the authors: kolf@handelsblatt.com and ludowig@handelsblatt.com

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