Problematic merger of Kaufhof and Karstadt stores

Author: Mario Schmidtgen
Date: 28.08.2018

Deal could burst due to financial difficulties

The merger of the two department stores Galeria Kaufhof and Karstadt is again facing a problem. There was still no agreement between the owners of the two shopping centers. According to both parties, the reason for this was that the responsible employees of the participating banks were on summer holidays. According to a letter from the regional state bank in Baden-Wuerttemberg (Landesbank Baden-Württemberg, short LBBW) the merger is facing another obstacle.

HBC faces financial problems

In a letter, LBBW obliges the Canadian Kaufhof owner Hudson’s Bay Company (HBC) to meet the terms of the credit agreed three years ago on September 30. If this does not happen, LBBW can reclaim the € 1.34 billion loan and the HBC would have to repay the money. The Canadian company is currently facing financial problems anyway and is probably not able to repay the sum. Until HBC cannot meet the credit conditions, the planned merger is uncertain.

The merger of the two department stores takes place under the Deutsche Warenhaus AG, which will consist of 34,000 employees and about 200 department stores after closing the deal. The merger would be the second largest department store group in Europe after the Spanish El Corte Ingles.

One reason for the merger is that Kaufhof and Karstadt are steadily losing revenues due to growing online commerce. But the focus of the deal is on real estate. After HBC took over Kaufhof about three years ago, the purchase of 41 of the total of 96 Kaufhof buildings was financed due a consortium of LBBW. The consortium was a credit of 1.34 billion euros. Twice a year it is checked if the HBC complies with the credit agreements. Right now this is not the case.

Increasingly red numbers at Kaufhof

In the evaluation by the banks, the main focus is on the business development of Kaufhof. HBC promised profits to the banks, but can only come up with red numbers. As the last fiscal year ended on January 31, the loss including all applications rose from minus € 88 million to minus € 98 million. The interest and tax-adjusted loss, called Ebit, grew at the same time from minus 79 to minus 86 million euros. Those numbers show that HBC is most likely unable to meet the credit conditions. LBBW does not want to be held back any longer and issued the ultimatum at the end of September. And more banks could reclaim their credits as well.

Management already legally secured

The management of Kaufhof has already secured their legal rights and hired the renowned international insolvency administration White & Case. The management is advised by the lawyer Biner Bähr, who has many years of experience with department stores and who often rescues his clients from the risk of bankruptcy.

No exact number of debts known

Despite the difficulties, the Austrian owner of Karstadt and real estate entrepreneur René Benko has great interest in the Kaufhof buildings. Although the negotiations have been going on for weeks, the exact amount of Kaufhof’s debts is still unknown. But Benko seems to cope even with that. The worst case for him would be a insolvency declaration by Kaufhof. Then the department store would most likely be split up and sold to different bidders. In this case, Benko would have less real estate than in the case of a merger.