BERLIN — Speculation is again heating up that Germany’s two main department store chains, Karstadt and Kaufhof, are heading toward a merger.

This story first appeared in the May 19, 2009 issue of WWD. Subscribe Today.

Karstadt, a division of the financially strained Arcandor Group, operates 120 doors in Germany with a workforce of about 30,000. The Metro Group’s 113 Galeria Kaufhof department stores in Germany employ about 25,000.

Although Metro said Monday that “no merger negotiations with Arcandor are taking place,” a company spokesman confirmed that Metro chief executive officer Eckhard Cordes sent a letter to the German economics minister regarding Karstadt. Metro further noted it is open to talks with both Arcandor and the government “with the objective of finding economically feasible solutions for the Karstadt department store locations.”

This is not the first time the prospect of one huge consolidated German department store group has captured headlines here, but the current speculation has been spurred by Arcandor’s increasingly precarious financial footing.

As reported, the embattled department store, catalogue and travel group is seeking federal loan guarantees of 650 million euros, or $884 million, by mid-June to secure its survival. Arcandor needs a further 250 million euros, or $340 million, in financing this year, as well as an additional 900 million euros, or $1.22 billion, over the next five years to carry out a radical restructuring program.

While observers have argued that the German government would be loathe to endanger the group’s 50,000 jobs in an election year, press reports suggest Arcandor’s request for guarantees is meeting with growing resistance. The Metro Group has already said it opposes any state aid for Arcandor for regulative and competitive reasons.

A merger of the two groups into what is being called Deutsche Warenhaus AG, or German Department Store Inc., would result in neighboring Karstadt-Kaufhof stores in many key cities. Many of Karstadt’s stores are unprofitable, and observers predict that only about 150 of the consolidated 247 houses would be operable in the long run.

A spokesman for Arcandor was not available for comment Monday, but has been quoted as saying Arcandor spies several hurdles to a possible merger, including federal antitrust approval for what would effectively create a German department store monopoly.