By  on April 20, 2009

BERLIN — As part of a radical restructuring plan to improve cash flow and earnings, Arcandor AG, the struggling department store, catalogue and travel group, is spinning off its premium department store operations and a large portion of its catalogue business into a separate company called Atrys.

The new firm will control the department stores KaDeWe, Alsterhaus and Oberpollinger; eight underperformingKarstadt doors; 1,500 Quelle catalogue brick-and-mortar stores, and 115 Quelle Technical Centers. About 12,500 of Arcandor’s 50,000 employees could be affected.

The plan, revealed Monday, calls for Arcandor to concentrate on the “profitable core areas” of Primondo (catalogue, home shopping and e-commerce business); Karstadt (department and sport stores), and Thomas Cook (travel). The group has set midterm goals of an earnings before interest, taxes, depreciation and amortization margin of 7 percent for Primondo and 6 percent for Karstadt and a 4.8 percent earnings before interest and taxes margin for Thomas Cook.

Under the previous chief executive officer Thomas Middelhoff, Arcandor published adjusted figures for fiscal 2007-08, which showed an increase in group EBITDA, but according to financial circles, the group had a loss of 746 million euros, or $1.06 billion at average exchange, in the last fiscal year. Arcandor now says it will need new loans of as much as 900 million euros, or $1.17 billion at current exchange, in the next five years to carry out the consolidation program. This comes on top of this June’s refinancing of 600 million euros, or $780 million, in credit lines. Though the group’s refinancing plan is essentially based on further bank loans, Arcandor said it is also considering options to tap into state support.

At a press conference in Essen, Germany, Monday morning to unveil the changes, Arcandor’s new ceo, Karl-Gerhard Eick, said while the KaDeWe Berlin department store and the two other recently developed premium houses were “a profitable business sector,” these luxury-oriented houses no longer fit the group’s middle-market focus. Size is also an issue. Eick said Arcandor’s model format for its remaining 81 Karstadt department and 27 Karstadt Sport stores would be between 100,000 and 200,000 square feet. KaDeWe, in contrast, covers almost 650,000 square feet.

Sources close to the company expect the upscale stores to be quickly put on the block, with La Rinascente, Printemps, Galeries Lafayette or “financial investors” most frequently named as potentially interested parties. According to Arcandor, “the best options for all Atrys businesses…will be examined and implemented within the coming years. These include, among other things, disposals, strategic partnerships, management buyouts, restructuring or even closures.”

Arcandor further announced the implementation of a central purchasing policy, with the aim of achieving synergies of up to 350 million euros, or $456.4 million (or 5 percent of the total purchasing volume of 7 billion euros, or $9.1 billion) within two to three years. In addition, the new management board of the Atrys division is expected to significantly reduce what Arcandor called average annual negative cash flows (computed over several years) of 300 million euros, or $480 million.

Arcandor’s shares fell by more than 9 percent in midday trading to 1.63 euros, or $2.12, down from 1.74 euros, or $2.27.

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