By
with contributions from Melissa Drier
 on May 27, 2015

A bidding war is erupting for Kaufhof, Germany’s leading department store chain.

According to sources, Hudson’s Bay Co. has put in a bid for Kaufhof that tops a recent offer made by René Benko and his Austrian real estate company Signa Holding. Signa owns Germany’s other department store chain, Karstadt. WWD first reported HBC’s interest in Kaufhof on April 27.

The sources also said HBC’s offer was in the vicinity of $3 billion, but that Benko is determined to buy Kaufhof and could bid higher.

To help raise money for his bid, sources said Benko has sold Karstadt’s premium division to Thailand’s Central Group, an international department store operator that already owns the La Rinascente department store in Milan. The premium division includes the KaDeWe flagship in Berlin, Alsterhaus in Hamburg and Oberpollinger in Munich. KaDeWe and Alsterhaus are performing well, while Oberpollinger is said to be oversize and underperforming. A deal with Central could be revealed within weeks, the sources said.

Benko needs Kaufhof to effect a merger that would bolster the struggling Karstadt chain by achieving economies of scale and cutting more costs and jobs. Karstadt has been closing stores and battling with unions over cutbacks.

On the other hand, HBC is coming at Kaufhof from a position of strength. HBC’s retail operations had a strong 2014, and capital is being poured into the stores, including $250 million to renovate the Saks Fifth Avenue flagship in Manhattan over the next few years beginning this summer. In addition to Saks Fifth Avenue, HBC owns Lord & Taylor and Hudson’s Bay department stores.

“No comment,” Richard Baker, the governor and executive chairman of the Toronto-based HBC, said Wednesday when asked whether he’s bidding for Kaufhof.

Kaufhof, considered the Macy’s of Germany, does have much-owned retail real estate that would be of interest to Baker, a real estate executive turned retailer. Of Kaufhof’s 120 stores, about 60 are owned and the remaining units are leased. Baker’s stated acquisition strategy entails seeking companies with strong brand recognition, healthy operations and valuable real estate. Baker has been interested in expanding his retail empire into Germany.

“I understand the guys from Hudson’s Bay have made an offer for Kaufhof, higher than Benko’s, so they are sort of in the lead, but Benko is still determined to buy Kaufhof,” said a source close to the situation.

According to another source, “Hudson’s Bay is knee-deep into buying Kaufhof.”

Kaufhof, owned by Metro AG, operates 119 stores in Germany and 16 in Belgium. Though Metro has said Kaufhof is not part of its core business, signaling interest in a sale, current Metro chief executive officer Olaf Koch has long emphasized the retail group is under no pressure to sell for less than an “adequate” price. Metro operates cash and carry, hypermarket, electronics and department store businesses.

On-and-off merger talks between the two competing German department store chains go back over a decade, and in late 2011, both Benko and the former Karstadt owner Nicolas Berggruen entered a bidding war for Kaufhof. At that time, industry sources placed Benko’s unsuccessful bid at about 2 billion euros. He is said to have upped that bid to about 2.9 billion euros. As far back as 2008, Metro considered selling Kaufhof, determining that the retailer was no longer strategic to its core business.

In the second quarter ending March 31, Kaufhof posted an operating loss of 24 million euros, or $27.1 million euros, compared to a loss of 2 million euros, or $2.7 million, a year ago. Sales for the department store division slipped 1.2 percent to 674 million euros, or $760.5 million. On a same-store basis, sales were down 0.6 percent.

The 83-unit Karstadt recently revealed plans to close another five unprofitable stores in 2016. Karstadt also operates 28 Karstadt Sports stores.

In August, Karstadt was bought by Signa, the Austrian real estate company and investor, which acquired it from Berggruen. The Karstadt chain has been struggling for more than a decade and attempts to revamp and reposition it have borne little fruit.

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