By David Moin and Melissa Drier
with contributions from Joelle Diderich
 on September 11, 2018
Galeria Kaufhof

Raising money to cut debt, the Hudson’s Bay Co., owner of Galeria Kaufhof department stores in Germany, has formed a “strategic partnership” with the Signa Group, owner of the Karstadt department store in Germany.

René Benko’s Vienna-based Signa Group will pay 616 million Canadian dollars, or $468 million, to acquire a 50.01 percent stake in HBC’s European retail operations, and a 50 percent stake in HBC’s real estate in Germany. That leaves HBC with a 49.99 percent stake in the retailing operations, and a 50 percent stake in the real estate.

The transaction leads to the merger of Germany’s two department store chains, with a total of 243 stores and annual revenue in excess of 5 billion euros. The newly formed entity will be led by Stephan Fanderl, chief executive officer of Karstadt and Signa Retail, and include representatives of both retailers. HBC and Signa will share six board seats and have joint oversight of all major decisions for the new retail company.

“Putting the two operating companies together is a no-brainer,” said Richard Baker, governor and executive chairman of HBC. “It’s just tremendous value and synergies and the right thing to do. So that’s always been something that was of interest to us. As far as the structure with Signa, we think there’s a lot more value ahead of us in Europe. We think the value of the operating companies after the synergies is going to be advantageous to us.” Baker added that the deal creates “a well-capitalized retailer positioned for improved profitability.”

The news of the deal triggered a 5.47 percent lift in HBC’s share price to 11.37 Canadian dollars, or a 59-cent gain, as of midday, but by the close it was down 1.86 percent to 10.58 Canadian dollars.

Other officials cited a “significant overlap” between Galeria Kaufhof and Karstadt, leading to synergies and cost-savings and possibly store closings, which will all be divulged later. The deal is expected to close in the fourth quarter.

HBC will use the proceeds of the transaction to pay down debt, which is about 4.2 billion Canadian dollars.

The Toronto-based HBC’s retail operations in Europe also include Saks Off 5th Stores, the Inno department store chain in Belgium and some Hudson Bay stores in the Netherlands. They will be part of the partnership as well. Also part of the partnership is Karstadt Sport.

The deal values the partnership’s real estate in Germany at 3.25 billion euros, or $3.76 billion. There are three main components to the partnership: HBC’s sale of 50.01 percent of the retail operations; the sale of 12 percent of HBC’s 62 percent interest in the 41 German properties currently held by HBS Global Properties, which is HBC’s joint real estate venture with Simon Properties, and thirdly, HBC’s sale of a 50 percent interest in 18 other German properties wholly owned by HBC.

“I am very excited about this transaction. It’s a real win for the Hudson’s Bay Co.,” Helena Foulkes, ceo of HBC, told WWD. “Since I joined the Hudson’s Bay Co., we have really been focused on creating value for our shareholders. This is exactly what it does.”

She said just the cash from the deal and HBC’s 50 percent stake in the German real estate are worth 8.71 Canadian dollars a share, which is 80 percent of HBC’s current share price of 10.20 Canadian dollars. The deal also values HBC’s real estate in Germany at 1.1 billion Canadian dollars more than it was valued at three years ago when HBC bought Galeria Kaufhof.

“The transaction is another step in demonstrating the total value of our company,” Foulkes said.

Aside from unlocking value in the company and reducing HBC’s debt, the deal enables HBC to focus more on its North American retail operations, rather than struggling in Europe.

“The German retail market is difficult,” acknowledged Foulkes, though she added, “I have been happy with what the team was working on, including opportunistically cutting costs and differentiating [the business] for the long term. Both companies will be stronger together and joining forces with the other leading department store in Germany allows us to move faster in terms of taking costs out by joining forces with the other leading department store in Germany and creating a model for consumers that is really differentiated.”

The deal with Signa is just the latest asset sale by HBC. Earlier this year, HBC sold off Gilt to Rue La La, and last year struck a deal to sell Lord & Taylor’s Fifth Avenue flagship to WeWork. Lord & Taylor is also streamlining with 10 branch stores targeted to close.

The idea of a Kaufhof-Karstadt fusion has been making the rounds for decades, first under Karstadt and former Kaufhof owner Metro, which consistently blocked the deal. Benko, who acquired Karstadt in 2014 and had also been interested in taking over Kaufhof, put the idea back on the table when HBC won the bid for Kaufhof in 2015.

In November 2017, HBC turned down Benko’s offer of 3 billion euros for the 112-door chain. While HBC does not break out figures for Kaufhof, the chain remains in the red. Karstadt, on the other hand, recently returned to profitability.

HBC, which is scheduled to issue its second-quarter results Wednesday, also operates Saks Fifth Avenue, Lord & Taylor, Saks Off 5th and Hudson’s Bay department stores in North America.

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