Hudson's Bay packs Kaufhof assets into JV, plans German expansion

The takeover last month of listed group Metro's Galeria Kaufhof retail chain by Canada's Hudson's Bay Company had obviously been the subject of considerable forward planning, to judge by the buyer's subsequent plans to deal with the individual stores in it's newly-acquired portfolio.

Hudson's Bay Company (HBC) bought Galeria Kaufhof's 103 department stores, 16 SportsArena stores and 16 Galeria Inno locations across Belgium for an enterprise value of €2.42bn. It plans to sell a minimum of 40 stores of 59 Kaufhof-owned properties into a new joint venture with giant US REIT Simon Property Corp. for at least €2.4bn, which itself will largely finance the entire acquisition. HBC will own 65% to 85% of the new venture.

Among those stores destined for allocation to the new JV are the Kaufhof stores at Frankfurt Hauptwache, Berlin Alexanderplatz, Cologne Höhe Strasse, Düsseldorf Königsallee and Düsseldorf Carsch-Haus

“These are exciting transactions that demonstrate our proven growth formula in action: improving solid retail operations, unlocking the value of real estate and growing through acquisitions,” said Richard Baker, HBC’s governor and executive chairman, in a statement. “We have been carefully surveying the European retail landscape for many years for a potential expansion opportunity and have watched Kaufhof build on its exceptional real estate to become the No. 1 department store in Germany.”

HBC — Saks Fifth Avenue and Lord & Taylor’s parent company — will now operate 464 stores, with about 44 percent of sales generated in the U.S., 31 percent in Germany, 23 percent in its home country of Canada and 2 percent in Belgium, the firm said.

“This acquisition is a significant step forward in our plans to become a premier international retailer,” said Jerry Storch, CEO of HBC, in a release. “With Kaufhof, we will operate eight leading banners in Canada, the United States, Germany and Belgium. Expanding our footprint into Europe with Kaufhof also provides us with a strong foundation to explore additional opportunities for growth throughout the Continent.”

Shareholders of HBC in Canada have cheered the German acquisition, which boosts the value of its real estate by 20% to C$11bn ($8.9bn), and sees HBC having to issue neither shares no debt to finance the deal. The JV with Simon Property will be primed in such a way as to allow it list as a separate vehicle as an IPO at a later point.

In the meantime it will serve as a platform for future retail expansion throughout Europe, similar to how HBC chairman Richard Baker has created a property empire in North America out of retail underpinned by leading retail names such as Saks Fifth Avenue and Lord & Taylor.

"This acquisition provides a strong European base for future retail expansion,” Jerry Storch, chief executive officer of Hudson’s Bay, said on a conference call the day after the Kaufhof deal closed. “There are additional growth opportunities in Europe for the Simon-HBC real estate joint venture.”

The Kaufhof stores, which are the No. 1 department stores in Germany and Belgium, make up 1.5 million square meters, of which Hudson’s Bay is selling 12 million to the Simon joint venture. The retailer will work on the remaining Kaufhof 400,000 sqm and may sell the properties to the partnership at a later date, chairman Baker said, also on the conference call.

Baker added that he had been looking for buying opportunities in Germany since 2006. "These are really fantastic, landmark, marquee properties and (the deal) will create value both in our real estate company and our public operating company,” Baker said, adding the pact will immediately add $200 million to the company annually in operating earnings. “This is a very, very accretive deal for the Hudson’s Bay Co.”

Real estate aside, the key attraction in HBC's eyes are the many Kaufhof similarities with HBC's own stores in Canada and the US, such as a dominant local market share, prime urban real estate locations, a solid network of suburban stores and a roughly similar competitive environment, including growing their digital commerce interests. Improving Kaufhof's flat sales of the past four to five years through HBC's successful merchandising techniques can generate immediate improvements, said Baker.

"Kaufhof has been owned by a German mass merchandising company and managed very much like a box (retailer),” he added. “They didn’t take a lot of risks in the department store space. We are buying a business that has very little downside and has a lot of opportunity for growth and expansion.”