WWD.com/globe-news/department-stores/arcandor-management-shift-stirs-speculaton-1881630/

BERLIN — Talks of a possible fusion between Germany’s Karstadt and Kaufhof department store chains are again making the rounds, in light of the recent management shake-up at Karstadt’s parent company, Arcandor.

This story first appeared in the December 9, 2008 issue of WWD.  Subscribe Today.

Both department store groups are facing tough times, though analysts suggest the Metro Group’s 141 Kaufhof department stores, which were put on the block in the spring, are stronger as a group than the 120 Karstadt doors. While Karstadt’s parent Arcandor is beset with financial problems, the announcement last week that Karl-Gerhard Eick would replace Thomas Middelhoff as Arcandor’s chief executive officer on March 1 renewed talk of a possible merger. Eick, who is currently deputy chairman and financial chief of Deutsche Telekom AG, previously worked for Haniel. And Haniel’s ceo, Eckhard Cordes, is also the head of Metro.

“Putting two weak companies together doesn’t necessarily make a strong company,” commented a German analyst, “but it could make sense perhaps. But the new [Arcandor] management is not yet there, and major changes are not to be expected in the next months.”

There are pros and cons to a Karstadt-Kaufhof fusion, said another analyst. It’s not clear if the German Federal Cartel Office would approve a merger that would essentially create a department store monopoly. And then there’s the question of real estate. The two chains are often close neighbors in urban centers, and while Kaufhof still owns most of its store locations, Karstadt owns none, having sold its entire department store real estate portfolio to a company jointly owned by the Whitehall Fund and Arcandor.

“To create synergies, one would have to close about half the doors. Selling the Kaufhof properties is unlikely, and if one closed the Karstadt doors, the tenants would be gone, which wouldn’t make the Arcandor interests happy,” the analyst said.

Moreover, he argued, Kaufhof has developed relatively well in the last year. “The EBIT margin is up and the trading-up strategy is bearing fruit. Kaufhof has a better operative standing and basically, Karstadt needs Kaufhof, not the other way around. It would make no sense for Kaufhof to go into it.”

Arcandor has a turbulent 12 months, and indeed more, behind it. Middelhoff implemented many structural changes during his often dramatic four-year tenure at the Essen-based department store, catalogue and travel group. He moved to reduce Arcandor’s debt by selling off its department store real estate portfolio after divesting the group’s smaller retail doors, specialty store chains and logistic centers. But despite an ongoing tone of bravado, Arcandor has continued to struggle with weak retail performance and increasingly complex financial challenges.

The company’s stock has lost more than 80 percent of its value this last year, leading former majority shareholder and Middelhoff supporter Madeleine Schickedanz to sell much of her stake to private bank Sal Oppenheim. Sal Oppenheim is now the largest investor with an almost 30 percent holding, and, according to reports, it was Friedrich Carl Janssen, an Oppenheim partner and Arcandor’s new supervisory board chairman, who brought Eick into the picture.

Considered financially astute and a “controller through and through,” Eick’s appointment has helped Arcandor shares return to the 2 euro zone. The stock was trading Monday afternoon at 2.40 euros, or $3.11, after a 52-week low of 1.31 euros, or $1.70, and 52-week high of 20.16 euros, or $26.11. All dollar figures are calculated from the euro at the current exchange rate.