Hudson’s Bay looking to buy Kaufhof from Metro AG

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The Toronto-listed Hudson’s Bay Company is reported to be looking at buying German department store chain Kaufhof from the DAX-listed Metro AG for a sum potentially as much as €2.6bn – considerably more than any amount mentioned in connection with a possible Kaufhof sale in the past.

News of the potential deal was first reported in the American publication Women’s Wear Daily, which said that talks were still at a preliminary stage. Hudson’s Bay Co. (HBC), which is Canada’s most venerable company with a history stretching back to the mid-1600’s, has been looking to make more acquisitions outside North America, after buying the upmarket Saks Fifth Avenue chain just over a year ago for $2.4bn.

HBC’s chairman Richard Baker, an American real estate tycoon, outlined HBC’s expansion plans in a call with analysts earlier this month. He said “the quality of a brand is very meaningful to us” and the company’s focus would be to acquire retail in the luxury or “better, mid-tier space” and in the off-price discount sector, such as Saks Off 5th. Kaufhof would be positioned in the mid-to-higher price segment, occupying a similar position in Germany to the Hudson’s Bay stores in Canada.

Baker clarified the company’s expansion strategy: “Our criteria is to firstly acquire companies that provide us with synergies - so cost savings. Secondly, provide us an opportunity to operate the business maybe better than the existing management operated it. And thirdly is to have some sort of a real estate component….We have the capacity and the financial capability to do a transaction at this time but we're very picky and very careful and relatively slow and conservative on acquisitions.”

Kaufhof has been on the block for several years in Germany, and has often been mooted as a potential merger partner with likewise mid-priced department store chain Karstadt, owned by the Austrian Rene Benko’s Signa Group. Metro AG chief executive Olaf Koch has made no secret of the fact that he would be happy to sell Kaufhof for a reasonable price as it no longer fits in to Metro’s longer-term strategy, which is to focus on its cash-and-carry and consumer electronics businesses (MediaMarkt and Saturn). However, he did stress in February this year that modernising the chain was current highest priority, ahead of any immediate sales plans, while adding that the number of interested suitors had risen noticeably.

Unlike Karstadt, Kaufhof has been operating profitably, posting adjusted EBIT in 2014 of €193m on sales of €3.1bn. It operates 105 department stores under the names Galeria Kaufhof and Kaufhof, as well as 17 sporting goods stores under the Sport Arena and Wanderzeit banners. In Belgium, it runs 15 Galeria Inno stores.

The German family office Haniel, the largest single shareholder in Metro AG, has been looking for an exit from its Metro engagement for years. With a 200-year-old history of its own to nearly rival HBC, Haniel has built its business from its Duisburg base on the back of trading in tobacco, tea and spices, while Hudson’s Bay grew from its origins as the original monopolist in trading in animal skins and furs for the emerging north American continent. Last year HBC had turnover of more than €6bn (Can$8.16bn) and net profit of €177m (Can$238m) from its stores, including Hudson’s Bay Co. stores, Saks Fifth Avenue, fashion chain Lord & Taylor and household supply group Home Outfitters.

HBC’s fortunes have been rising of late under the aggressive real estate-driven approach shown by Baker since taking the helm at the company. Last year profits rose four-fold to $111m, helped by a stronger US dollar to the Canadian currency, a further factor in making the euro-denominated deal for Kaufhof attractive.

In February of this year Baker announced that HBC was entering joint ventures with Toronto-based RioCan REIT and the giant Indianapolis-based Simon Property Group Inc. to create new companies valued at Can$4.2bn aimed at boosting the real estate values of the groups. The two partners have made property and cash commitments of more than $670m to the joint ventures, while Hudson’s Bay is committing a portfolio of many of its key properties valued at more than $3.8bn.