Retail rescue

Nicholas Berggruen has been given a reprieve by a German court to finalize takeover negotiations with the creditors of department store chain Karstadt, the troubled retailer's insolvency administrator said on Tuesday. It's the third extension Berggruen has received.

"The period of negotiating, hesitating and blocking has got to come to an end," administrator Klaus Hubert Goerg said.

Berggruen, who signed a deal to acquire Karstadt in June, now has until September 2 to get Karstadt's creditors on board, which include Valovis Bank and the Highstreet real-estate consortium led by the Goldman Sachs Group.

All the parties involved say they are confident they can reach an agreement before the deadline, although Berggruen and the creditors have been haggling for months over the conditions of the takeover plan. According to analysts, they have still not reached a final agreement on Berggruen's desire to further lower store property rents.

Highstreet has already offered two rounds of rent reductions but Berggruen reportedly wants further concessions.

"For example, Valovis would have a problem with that because they would have to reduce the value of the stores it owns if the rents were lowered," Klaus Kraenzle, an analyst at GSC Research in Dusseldorf, told Deutsche Welle. "It's simple math."

A lawyer for Valovis said last month that the bank would face "significant liability and legal risks" under Berggruen's demands. It holds 36 of Karstadt's 120 stores as collateral.

High stakes

The stakes are high for the national retail landscape. Not only is Karstadt an iconic retailer whose big-box stores are landmarks in most downtown German shopping districts, the company also employs more than 25,000 people and risks being shuttered if a takeover plan does not go through.

Despite carrying an official price tag of just one euro, debt transfers mean Berggruen's offer for Karstadt is thought to be worth about 70 million euros - plus another 240 million euros in capital expenditure over three years.

The US-German billionaire, who is the son of well-known German art collector and journalist Heinz Berggruen, won the bidding for Karstadt in June, edging out two other offers. While the sales contract has been signed, it is subject to "certain conditions" such as the agreement on revised rental conditions.

Berggruen has promised not to cut jobs at Karstadt nor close its stores, and has said the company could recover from the ongoing erosion of department stores' market share in Germany.

"Karstadt was not managed in the optimal conditions," Berggruen told the Financial Times. "If you put in some imagination and creativity and focus, the business can prosper."

But will it work?

Some analysts, however, are wondering if the era of the big department store is simply over, despite a long and illustrious history.

Karstadt's first department store opened in 1881, during the reign of Kaiser Wilhelm I. Its premiere West Berlin store - Kaufhaus des Westens, or KaDeWe - was an icon of capitalism during the Cold War.

But department stores have lost tremendous market share to discounters, speciality stores and the Internet. In 2008, online retail sales in Germany surpassed those of all the country's department stores combined.

In the summer of 2009, Karstadt filed for insolvency when parent company Arcandor, a retail and tourism giant, went under. Arcandor has already sold off its mail-order subsidiary Quelle.

"Karstadt had suffered under bad management for years," said analyst Kraenzle. "It didn't know how to use its synergies, especially when it came to Quelle. It completely missed the boat on Internet commerce."

Kraenzle said Karstadt currently has a 50/50 chance of survival.

Author: Kyle James
Editor: Sam Edmonds