Saks owner to buy Germany's Kaufhof chain for $3.2 billion

By Matthias Inverardi

DUESSELDORF, Germany (Reuters) - Hudson's Bay Co (Toronto:HBC.TO - News) is buying Germany's leading department store chain, Kaufhof, from Metro (XETRA:MEO.DE - News) for 2.8 billion euros ($3.2 billion), giving the Saks owner a launch pad to expand into Europe.

The deal, the largest German inbound M&A this year, comes as department stores start to enjoy a revival by investing in ecommerce in tandem with revamped flagship stores.

Hudson's Bay, whose shares rose as much as 13.4 percent, said it would sell at least 40 of Kaufhof's owned or partially owned properties to its real estate joint venture with Simon Property Group (NYSE:SPG - News) for at least 2.4 billion euros.

The company said it expects to fund the Kaufhof deal from the proceeds of the sale of the real estate. Hudson Bay said it does not intend to issue equity and expects to incur limited additional debt.

Kaufhof's 120 stores occupy prominent locations in most major towns and cities, employing 21,500 staff and making sales of 3.1 billion euros. It also operates 16 stores in Belgium.

Hudson's Bay, founded in 1670, is the oldest continuously operating company in North America.

The company also operates the upmarket Lord & Taylor department store chain.

Under NRDC Equity Partners Chief Executive Richard Baker, who is now Hudson's Bay chairman, the group went on to buy U.S. luxury retail chain Saks Fifth Avenue in 2013 for $2.4 billion.

Hudson's Bay now sees the Kaufhof deal, due to close at the end of September, as the next step in its plan to become a "premier global retailer."

"This is a strong foundation to explore additional opportunities for growth throughout the continent," said Chief Executive Jerry Storch.

Hudson's Bay may bring the Saks banner, best known for its Manhattan Fifth Avenue flagship store, to Germany and Belgium, either by carving out space in Kaufhof stores or by buying or leasing property, Baker said at a news conference.

Hudson's Bay also aims to expand Kaufhof's ecommerce "aggressively" to take advantage of the role its stores can play as local distribution centres to beat online-only rivals, a strategy dubbed "omnichannel" shopping in retail jargon.

"There is a rebirth of department stores driven by the Internet, by the omnichannel model," Storch said.

Ecommerce is growing fast in Germany, which is Amazon's (NasdaqGS:AMZN - News) second-biggest market, but stores such as Kaufhof have been slower than their North American rivals to integrate their online offering fully with their stores.

GERMAN APPEAL

The deal is a rare move by a foreign retailer into Germany, a country seen as too risky since Wal-Mart Stores Inc (NYSE:WMT - News) was forced to retreat in 2006, but one with consumer sentiment now at its highest since 2001.

Germany is benefiting from record-low unemployment, bumper wage deals and ultra low interest rates.

The country's appeal was underlined last week when Thailand's largest retail conglomerate, Central Group, said it would buy a majority stake in three luxury department stores in Germany.

Metro, Europe's fourth-largest retailer, has long wanted to sell Kaufhof to focus on developing its cash-and-carry and consumer electronics businesses. It has steadily sold off non-core businesses in recent years to reduce debt.

Metro said it expected the sale to have a positive impact of about 700 million euros on earnings before interest and taxes (EBIT) and allow it to cut net debt by about 2.7 billion euros.

Metro CEO Olaf Koch said the deal would also enable more investment in the company's other divisions and new countries.

Metro's shares, which had risen in anticipation of the sale, ended regular trading down 4.7 percent, with traders saying investors had hoped Hudson's Bay would pay as much as 3 billion euros.

Hudson's Bay said the deal, which includes assumption of Kaufhof's liabilities, should deliver immediate value to its shareholders, with cost savings from overlaps expected in merchandising and sales of private label goods.

The sale thwarted a rival bid by Austrian investor Rene Benko, the owner of struggling rival chain Karstadt, who had been expected to merge the two businesses, likely resulting in numerous store closures and job losses.

Benko's Signa group said in a statement it regretted Metro's decision and would concentrate "on forging ahead with the extremely positive development of Karstadt."

Metro's Koch said key to the decision to accept the Hudson's Bay bid was a pledge to retain current staff. Hudson's Bay has promised not to close any stores or reduce the workforce for three years, Baker said

German trade union Verdi welcomed the commitment but said it wanted a legally binding agreement, as well as maintaining collective wage bargaining and worker participation in management of the business.

Hudson's Bay was advised by BofA Merrill Lynch, Willkie Farr & Gallagher LLP and Stikeman Elliott LLP. Metro was advised by JP Morgan, Deutsche Bank and Clifford Chance.

(Additional reporting by Emma Thomasson; Writing by Jonathan Gould and Emma Thomasson and Sneha Banerjee in Bengaluru; Editing by David Clarke, Don Sebastian and Steve Orlofsky)