Retail therapy

Karstadt now has more breathing space. Willing to bend still further to help find a buyer and recoup a percentage of their claims, creditors agreed this week to a new insolvency plan with one major condition – that it contain no end-of-April deadline to sell the venerable German department store chain.

The proposal to remove the deadline was put forward by the HighStreet consortium led by Goldman Sachs, Deutsche Bank and Pirelli Real Estate. The consortium, which owns about two-thirds of Karstadt's store space, hopes to join other creditors to cash in on claims in Karstadt's bankruptcy, estimated at about 2.8 billion euros.

Prevent cherry-picking

Insolvency administrator Klaus-Hubert Georg initially agreed to sell Karstadt's remaining 120 stores in one block to avoid the cherry-picking of its most valuable assets – a prerequisite to win concessions from real estate owners and employees. On Monday, Georg, too, showed greater flexibility, indicating that he would consider selling parts of the company if an investor made a good offer. But he was quick to point out that no one had yet made one.

Karstadt was part of the German retail group Arcandor, which filed for bankruptcy last June. Another member of the group, the German mail-order giant Quelle, filed for bankruptcy a couple of months later.

Georg confirmed that six investors have been studying Karstadt's books but did not identify them. Names surfacing in the German media include Apollo, Blackstone, Pamplona, Permira and Sun Capital.

Karstadt-Kaufhof merger?

Some investors are said to be interested in Karstadt if they can also snatch up rival chain Kaufhof and merge the two. Kaufhof's owner, the German retail giant Metro, is keen to sell its department store unit to focus on its cash-and-carry and consumer electronics operations – but only if the price is right. To spruce up its department store assets, Metro has considered purchasing profitable Karstadt stores but has shown no interest in buying the entire chain.

Independent German retail consultant Ulrich Eggert said the ideal solution "is for an investor to buy both Karstadt and Kaufhof, merge them and optimize their stores on a regional basis." The consultant believes that the department store model is far from dead, and that department stores around Germany continue to draw consumers into the cities.

But matching Metro with the right investor will be "a bit of a challenge," Eggert said. "Metro runs retail businesses, knows what they're worth and won't settle for less if it decides to sell an asset. Private equity companies, on the other hand, want to buy low and sell high."

Employees are the big losers

Another problem, according to Eggert, lies with employees. He believes they will lose out on all fronts – whether Karstadt folds, is sold or merged. "The new owner will need to optimize operations, and that means selling some and turning others into specialized stores for sports, consumer electronics and the like," he said. "There will be fewer jobs, and many of these will go to younger people."

Currently, Karstadt has around 120 stores and more than 25,000 employees. Kaufhof has roughly the same number of stores and employees. A merger of the two would result in a group with between 130 and 150 stores, Eggert estimates. As for the number of remaining employees, "just do the math," he said.

Author: John Blau
Editor: Sam Edmonds