Richard Baker is out to build a global retail empire and took a big step forward in his quest by revealing what had been expected for weeks — the acquisition of Kaufhof, Germany’s leading department store chain, by the Hudson’s Bay Co.

This story first appeared in the June 24, 2015 issue of WWD. Subscribe Today.

Baker, the governor and executive chairman of the Toronto-based HBC, along with the retailer’s chief executive officer Jerry Storch, told WWD that the Kaufhof deal represents the creation of a “global platform” for expansion, including potentially bringing Saks Fifth Avenue and Saks Off-5th to the European market, and further retail purchases.

“There is certain square footage we can use to open Saks Fifth Avenue and Saks Off-5th in Germany and Belgium,” Baker told WWD on Monday, right after HBC said it had entered into a definitive agreement with Metro AG to acquire Kaufhof for 2.42 billion euros, or $2.72 billion. It will fund the acquisition by selling at least 40 Kaufhof locations to its previously announced joint real estate venture with the Simon Property Group for 2.4 billion euros, or $2.7 billion.

In addition, officials said that bringing Kaufhof into the portfolio increases the buying power of HBC and clout over vendors; enables the European and American retail operations to share brands they didn’t sell before and work together to boost private label penetration, and brings additional real estate into HBC’s joint venture with Simon Property Group, increasing the possibility of turning the venture into a real estate investment trust.

HBC executives also noted that Kaufhof is under-developed in its digital selling and omnichannel initiatives. According to Storch, Kaufhof stores are typically “downtown where people live, on the high streets, which means omnichannel can work better here than anywhere. Germany and Belgium are tailor-made for the omnichannel model.”

HBC beat out Austrian real estate magnate René Benko, owner of Germany’s second major department store chain Karstadt, in the bidding for Kaufhof. Metro chairman Olaf Koch said a key factor in HBC’s favor “was the fact that HBC has made binding [three-year] guarantees to take on the approximately 21,500 Galeria Kaufhof employees in Germany and Belgium.”

The announcement confirms WWD reports on April 27 and May 27.

The Simon-HBC joint venture will pay for the 40 Kaufhof locations with a real estate term loan secured by the properties, debt secured by Saks and Lord & Taylor properties that the joint venture will own, $600 million in equity from third parties or HBC, and $179 million supplied by Simon to the joint venture. HBC said it expects to retain a 65 percent to 85 percent stake in the joint venture. Kaufhof will lease back the sites from the joint venture.

Baker, a real estate executive turned retailer, has a track record of profitable real estate deals, but he and Storch underscored that as much as they saw value in the Kaufhof real estate, they were most motivated by the German group’s retail operations and what they bring to the HBC enterprise. Kaufhof operates 103 Galeria Kaufhof locations and 16 Sportarena stores in Germany as well as Belgium’s only department store, the 16-unit Inno chain.

For the 12 months ended March 31, Kaufhof generated sales of 3.1 billion euros, or $3.48 billion, and normalized earnings before interest, taxes, depreciation and amortization of 282 million euros, or $316 million.

The acquisition is expected to close by the end of the third fiscal quarter of 2015.

Regarding Saks, Baker said it was too soon to discuss any details of a potential rollout of Saks and Saks Off-5th in Germany or Belgium. HBC is expanding the two Saks formats into Canada next year.

He also declined to cite other retail companies he may be considering roping into the growing HBC stable of retail brands, though he has expressed interest in Neiman Marcus. The Dallas-based chain would be tough to buy, though, considering two years ago it was purchased by Ares Management and the Canada Pension Plan Investment Board for $6 billion.

Karstadt could be of interest as well, considering there has long been merger discussions between Karstadt and Kaufhof to create a single German department store chain. Karstadt is the weaker of the two department store businesses, and earlier this month sold off its three-unit KaDeWe luxury retailer to La Rinascente in Italy, which is owned by Thailand’s Central Group.

The Kaufhof deal appears to be another shrewd one for Baker, who two years ago led HBC’s acquisition of Saks, buying the luxury chain for less than the value of its real estate.

HBC’s Kaufhof deal “will require no equity and issuing little to no additional debt and the EBITDA of HBC is going up by 200 million Canadian dollars,” Baker said in the interview, which converts to $225 million. “This is a very nice deal for HBC.”

He mentioned that HBC will take on some financial obligations, including a 405 million euro, or $445 million, pension obligation requiring funding of 15 million euros, or $16.5 million, a year, and store improvements at Kaufhof, and that unlike past HBC store acquisitions in North America, Kaufhof will not lead to savings through synergies.

“These are great retail operations,” said Storch. “This is a huge opportunity on the revenue side. This gives us a global platform positioning the Hudson’s Bay Co. for growth.”

Storch said Kaufhof in Germany alone generates revenues of 2.9 billion euros, or $3.26 billion, while Inno generates 400 million euros, or $449 million and Sportarena generates 100 million euros, or $112.3 million.

“The stores are in very good shape,” Baker said, adding that there are no plans to change the management team at Kaufhof, though he later said in a conference call that the “business has been run very flat, very conservative over the last four or five years. It’s been owned by a mass merchant and run very much like a bond — very predictable sales, very predictable EBITDA. I think Kaufhof is very stable. It could get a lot of benefit from being owned by a specialist in department stores. We can help them understand where they should take some risk and where they should be more conservative. It’s been run pretty much for cash. The team is excellent and has been managing it for consistency, year after year after year.”

For HBC, which operates Saks Fifth Avenue, Saks Off-5th, Lord & Taylor and Hudson’s Bay department stores, as well as Web sites under those brands, Kaufhof marks the retailer’s first expansion outside North America, though the company does have licensed Saks units in Asia and the Middle East as well as in Mexico.

With Kaufhof, HBC will operate a total of 464 store locations in four countries generating 13 billion Canadian dollars in revenue, or $10.54 billion, and more than 754 million Canadian dollars, or $611.3 million, in adjusted EBITDA. The officials also said the company has 11 billion Canadian dollars, or $8.92 billion, in real estate value.

Kaufhof will represent 33 percent of HBC’s sales volume.

“In a very short period of time, Richard Baker has put together a major company and is now going truly global,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon. “North American-based department stores have not gone overseas aside from some licensing situations. So while this move to become a truly inter-continental global conventional department store chain might initially sound counter-intuitive, Baker has demonstrated unusual insight in successfully combining retail and real estate strategies with Lord & Taylor, Hudson’s Bay, Saks and including the sell-off of Zellers.”

“We’re encouraged HBC expects the acquisition to be significantly accretive to earnings per share, without any synergies, and generate C$200 million of incremental EBITDA,” according to a research report from Cowen & Co.

“The combination makes for a very strong company for vendors to deal with,” said retail analyst Walter Loeb, describing Kaufhof’s merchandising as close to Macy’s. But Loeb downplayed the possibility of Baker one day merging Karstadt with Kaufhof.  “You get into regulatory problems that you wouldn’t want to face,” he said.

Baker said Kaufhof fits into HBC’s business model of attaining growth by improving retail operations, unlocking real estate values and through acquisitions of businesses with strong brand identity.

“We have been carefully surveying the European retail landscape for many years for a potential expansion opportunity and have watched Kaufhof build on its exceptional real estate to become the number one department store in Germany. We are excited to work with the existing Kaufhof management team,” he added.

Some retail experts have questioned the wisdom of HBC buying Kaufhof and expanding into Europe at a time when it already has a full plate of projects in North America, including trying to improve profitability at Lord & Taylor and Saks. Both have shown weak profits for years. Saks has been renovating stores and remaking its merchandise matrix,while Lord & Taylor has been working hard to develop exclusive merchandise and ways to differentiate.

HBC is also expanding Saks and Saks Off-5th to Canada, and renovating the Saks flagship in Manhattan at a cost of at least $250 million.

But Baker responded to the question of whether he’s taking on too much with the addition of Kaufhof, stating, “Hudson’s Bay Company has added a tremendous amount of talent and strength to its management team,” citing the addition of Storch as ceo last December, as well as putting Don Watros in charge of international, and this year appointing Marc Metrick as Saks’ president and Dan Caspersen as executive vice president of HBC’s human resources. According to Baker, “the North American leadership team will be able to remain focused” on executing growth initiatives.

Storch said that Kaufhof management is “a critical part of what we are buying. We will work together with them.” Having local management in Germany is essential, he added. Another motivation for buying Kaufhof – attaining scale. “Scale is critically important today. Hudson’s Bay Company will never sit still…Expanding our footprint into Europe with Kaufhof also provides us with a strong foundation to explore additional opportunities for growth throughout the continent,” Storch said.

While HBC said Kaufhof’s management is expected to remain in place following the closing of the acquisition, thereby providing separate management teams for each business in North America and Europe, Kaufhof management will be reporting to Baker, Storch and Watros.

In Canada, HBC’s real estate maneuvers to pay off debt and finance acquisitions have included the sale of the Zellers’ leases for 1.8 billion Canadian dollars, the sale and leaseback of HBC’s flagship Queen Street property for 650 million Canadian dollars, and the anticipated sale of up to 10 HBC properties to the RioCan-HBC JV for 1.7 billion Canadian dollars.
In the U.S., HBC independently appraised the Saks’ flagship property in New York at $3.7 billion and received a $1.25 billion mortgage on the ground portion of the property. HBC anticipates selling 42 Saks and L&T properties to the Simon-HBC joint venture for $1.7 billion.

The transaction will bring the Metro Group a positive cash inflow of about 1.6 billion euros, or $1.79 billion, and also markedly reduce its rating-relevant net debt by around 2.7 billion euros, or $3.03 billion, the German group said. Metro furthermore expects a positive EBIT effect of around 700 million euros, or $784.9 million, from the deal.

Dollar figures are converted at current exchange.

The smallest of the Metro Group’s four divisions, which are led by Metro Cash & Carry, the consumer electronics Saturn division and the Real Hypermarket chain, Galeria Kaufhof generated sales of 3.1 billion euros, or $4.21 billion at average exchange, for the 2013-14 fiscal year ended Sept. 30, 2014. Metro Group reported annual group sales of 63 billion euros, or $85.52 billion, in the period.

The Kaufhof divestment was not met with enthusiasm on the Frankfurt Stock exchange, where Metro AG’s shares were trading down 3.3 percent at 29.98 euros, or $33.64 at current exchange, at 1 p.m. CET on the Xetra electronic trading platform. by the end of the day, the shares were down 4.59 percent to 29.58 euros.