Metro AG looking to offload struggling retail subsidiary Real

German listed retail group Metro AG is looking to again sell off its retail subsidiary Real, along with a sizeable property portfolio, as it retreats back to being a classical wholesaler.

It won’t be the first time that Metro has tried to sell the Real chain. In 2012 it came close, and received an offer from a consortium of Apollo and Towerbrook, and another offer from KKR, before Metro withdrew and attempted to restructure the chain.

Real operates 282 markets across Germany, employing 34,000 staff. Of its stores, 65 are owned by Metro, and these would be part of the sale, according to Metro’s CEO Olaf Koch, who explicitly ruled out a separate sale of the properties to a non-operating third party. In a teleconference with analysts, Koch avoided putting a price on the enterprise or a valuation on the properties, saying simply that the assets had “significant value, with upside potential within the portfolio”, particularly for retailers looking to develop the “store-within-a-store” concept.

Since last year Metro has re-vamped 30 of its Real stores, and has introduced its “store-within-a-store” concept into 19 stores. Koch said recently that the upgrading of the Real stores has focused Metro management minds on the renewed attractions of selling the chain – that, plus increasing online competition and the new compulsory payment schedule in the low-wage segment for recently-hired workers. In the first three quarters of the business year 2017/2018, Real saw turnover fall by 1.5% to €5.4bn year-on-year, despite growing its online business.

Koch said that Metro was returning to its wholesale roots, and keeping Real now would mean it would ever only play second fiddle to the company’s main mission. He said that new Metro shareholder, Czech billionaire Daniel Kretinsky, had not tried to influence the decision to sell Real. Kretinsky bought the stake previously held for decades by German family-owned holding company Haniel. “We have had expressions of interest for Real over the last 18 months – but at the time we weren’t ready to sell. But we are now, and we’ll be mandating advisers and bankers shortly.” This was unlikely to be completed before the beginning of 2019, Koch added. A subsequent sales process is likely to take upwards of eight months, he suggested.

In 2012 Düsseldorf-headquartered Metro sold off the eastern European business of the Real chain to French retailer Auchan. Then, in 2015, it sold off its department store chain Kaufhof along with its 59 stores to the Canadian Group Hudsons Bay Company, followed in 2017 by the splitting up of its business into grocery (Metro and Real) and electronics (Ceconomy).

A report by Reuters suggested that any bidders are likely to be private equity firms, as it would be very hard to find another retailer willing to take on the challenge of competing with market heavyweights Aldi and Lidl, as US retailer Walmart found to its cost when it withdrew from the German market in 2006 after several years of trying to make its low-price business model work, ultimately unsuccessfully.

Analysts have suggested that online giant Amazon could be interested after its acquisition of US grocery chain Whole Foods last year. Germany is its second biggest market after the United States, but grocery e-commerce is very undeveloped in Germany. Real’s e-commerce business still only makes up 2% of its €7.2bn sales, which overall has been operating at a loss.

A sales price of €1bn would be no obstacle to Amazon, they agree. However, in banking circles, buying Real is not viewed as high on Amazon’s shopping list. There is a view that Real could be sold for “near zero at best”, or even that Metro might have to pay to shift it off its books. The real estate value of the 65 stores that Metro owns is obviously worth something, but retailers are conscious of the problems that Edeka had with anti-trust concerns when it tried to buy loss-making supermarket chain Kaiser’s in 2015.

There is some speculation that fellow German supermarket chain Kaufland, held by Lidl owner Schwarz Group, could show an interest in some sites. However, Metro CEO Koch told journalists the aim was to sell Real as a whole rather than as a bundle of stores. Trade unions, who have been critical of Metro’s treatment of its 34,000 workers in recent years, have also been outspoken that Real should be sold as a whole, with any buyer agreeing a charter to protect the workers.

There were reports last week that Chinese investment firm Fosun International is in talks to buy a €426m stake in Metro, or about 8.8% of the company. The shares would be coming from Ceconomy, the company holding the electronics part of Metro. The logic behind the deal would be to provide access to mainland China’s retail market for consumer electronics.