Clearance sale
June 3, 2010
Metro has confirmed it plans to sell its department store subsidiary Kaufhof, at the same time reiterating its interest in buying some Karstadt stores from Arcandor, the retail and tourism group that collapsed last year.
By cherry-picking the rival chain's most profitable units, Kaufhof would undoubtedly become more attractive for investors. But administrators in charge of winding up Arcandor have made it clear they would prefer to sell all of Karstadt's 120 stores in a single package.
New potential buyer for Karstadt
Until last weekend, there were three known bidders for Karstadt– the Goldman Sachs-led consortium Highstreet, buyout firm Triton and billionaire Nicolas Berggruen - who had submitted detailed bids by a May 28 deadline.
Then came news of a fourth potential bidder: a spokesman for the chain's insolvency administrator confirmed on Saturday that they had received the letter, adding that they “forwarded it on to the investment bank to check." However, the spokesman declined to identify the interested party that may compete against the original bidders.
The Spiegel newsmagazine reported that a St. Petersburg, Russia-based businessman Artur Pakhomov had made an offer in the mid-double-digit million-euro range to buy the entirety of Karstadt.
The magazine also said Pakhomov was willing to finance Karstadt's Christmas 2010 sales season and planned to invest around 80 million euros ($98 million) annually to secure Karstadt's long-term viability and develop the chain internationally.
Pakhomov reportedly has interests in real estate and owns several hotels in St. Petersburg through his holding company, Karotex.
Decision expected soon
The question now is: who will take over the two traditional chains – founded in 1881 by Rudolf Karstadt in Wismar, and in 1879 by Leonhard Tietz in Stralsund?
Coincidentally, June 7 will mark a milestone in both cases.
Karstadt’s creditors’ committee, which is set to meet in the city of Essen on Monday, will decide which bidder will bag the contract. Based in nearby Dusseldorf, Metro is still some way away from making up its mind about the sale of its subsidiary Kaufhof.
However, with a view to the imminent Karstadt decision, Metro CEO Eckhard Cordes is keen to know how much interest there is. Therefore, potential Kaufhof buyers are also to lay their cards on the table by Monday. Among the interested parties are financial investors Apollo, Blackstone and Permira.
Despite reports that there may be a few investors who are interested in both chains, it appears there is still no single bidder for both.
Stark differences
Karstadt and Kaufhof stores attract more than three million customers per day. The retailers are often situated in the best locations of the city centers. Both department store chains are big employers, with a staff of about 25,000 each.
However, the circumstances leading up to the proposed sale of the two chains could not be more different.
In June 2009, Karstadt had to file for bankruptcy after plunging from one crisis to the next. Only a few are privy to the company’s current business figures. But an inventory drawn up by buyout firm Triton indicates that Karstadt’s turnover has declined constantly for 15 years – amidst rising costs.
Kaufhof on the other hand, presents a very different picture: Metro chief Cordes praises the group’s subsidiary like a good salesman whenever he has the opportunity to do so. He recently spoke of "sensational" developments at Kaufhof.
In 2009, the retail store increased its adjusted operating profit by 3.4 percent to 119 million euros, despite seeing turnover fall by 1.9 percent to 3.5 billion euros. However, the costs incurred by the group’s restructuring are not included in these figures. The net profit earned by Metro’s subsidiaries has not been published.
Why sell a valuable business?
Considering Kaufhof is so profitable, it begs the question as to by Metro wants to shed such a valuable subsidiary. Cordes is in the process of revamping the group, putting wholesale business at the core of the company.
Metro wholesale markets for traders produce most of the concern’s profit abroad. It will also focus on its consumer electronics operations, with the Media Markt and Saturn chains expanding in Eastern Europe and Asia.
In order to enter new markets such as Indonesia and Brazil, Cordes says the group will need more financial flexibility. He estimates Kaufhof can be sold for a price of 2-3 billion euros. What makes Kaufhof so valuable is the real estate: about half the stores are owned by Metro.
Retail stores on the way out?
A total of 200 German department stores - from the legendary KaDeWe in the capital Berlin to the Alsterhaus in Hamburg - are currently up for sale.
Retail expert Michael Gerling believes that the number of department stores in Germany will tend to fall, although he does not fear they will become extinct like dinosaurs.
One only needs to look at department stores in Switzerland, England and Spain show that they can be successful. However, he says the concept needs to be revised and polished a little. He adds that mergers and cost reductions cannot solve all problems.
Gerling says shopping must be an experience. "Today we don’t have to make the hungry content but instead make the content hungry."
rb/dpa/Reuters
Editor: Sam Edmonds