European retail: Arcandor facing a merger with Metro
Published:21-May-2009
By Staff Reporter
German group Arcandor's financial struggles have led to talks with Berlin regarding a state bailout, resulting in strong criticism from both politicians and retailers. As an alternative, rival Metro is proposing a takeover of Arcandor's Karstadt department store chain. Although both solutions could undermine competition in the market, the latter may rescue the struggling retailer in the long term.
Arcandor's bid for a state bailout could potentially result in a Karstadt-Kaufhof merger.
German retail and travel group Arcandor intends to apply for a credit guarantee of E650 million as it attempts to meet its loan repayments of E710 million due in mid-June 2009. The application's potential impact on competition in the market has led to strong protests from Arcandor's biggest rival, Metro. Metro Group is instead proposing a merger between its Kaufhof department store chain and Arcandor's Karstadt department store chain to form a franchise of 247 stores. As yet, no negotiations have taken place between the two retailers, as Arcandor's CEO Karl-Gerhard Eick wishes to put off potential talks until state aid is guaranteed.
In Germany, Karstadt is struggling in the tough department store sector. Indeed, the group was rescued once before and in April announced that it will attempt to raise a further E100 million through its shareholders.
The retailer's application for a loan guarantee has not only raised concerns with Metro but also with Germany's economic minister, Karl-Theodor zu Guttenberg. He claims that Arcandor may not be eligible for state aid as "management mistakes mustn't be cause for the state to help out with assistance". Furthermore, the government fears that the guarantee could affect competition. For such reasons, Metro is due to hold discussions with the government this week to come up with a viable solution.
Even if Arcandor is found to qualify for state intervention, such assistance would probably not solve its problems in the long term, as many difficulties have arisen as a result of chronic mismanagement. Furthermore, the German department store sector is in long term decline as a result of changing customer behavior. The out of town sector, the internet and city center shopping malls have eroded the competitive advantage this format once had.
Merging Karstadt with Metro's Kaufhof would create a monopoly in the market, with no other noteworthy competitors remaining. The merger would also lead to closures of Karstadt stores and a significant number of job losses, thus further exacerbating Germany's severe unemployment situation. However, such consequences might well be unavoidable, and if Arcandor wants to survive in the long term, Metro's proposal could be the best solution.
