Hudson’s Bay Co. on Tuesday struck a deal with its main European competitor to merge their German department-store chains in a move that will generate $616-million that HBC will use to cut debt and shore up its challenged retail business.
Toronto-based HBC, owner of Galeria Kaufhof in Germany, said it is forming a joint venture with Signa Holding GmbH, which runs Karstadt Warenhaus, bringing together Germany’s two top department-store chains. The deal follows a failed attempt by Austrian-based Signa to purchase Galeria Kaufhof outright in late 2017. HBC said in July that talks with Signa had resumed.
Under the agreement, HBC will own 49.99 per cent of the retail operations, and Signa will get a 50-per-cent stake in the joint venture’s combined real estate holdings. HBC, which also owns the Hudson’s Bay, Saks Fifth Avenue and Lord & Taylor banners, will get $616-million in proceeds from Signa in the deal.
“It allows us to have a very strong team in Europe driving that combined business,” Helena Foulkes, who became HBC’s chief executive early this year, said in an interview.
“But it also allows us in North America to focus on running a much better business here. … I do see a tremendous amount of opportunity in North America. We certainly still have a lot of work to do.”
HBC has struggled with weak results and attempts to restructure its business over the past number of years amid a fast-changing retail landscape and the emergence of low-cost e-commerce rivals, including powerhouse Amazon.com Inc.
By February of this year, when HBC named U.S. retail veteran Ms. Foulkes as CEO, she said the company’s performance was below its own expectations. “There is nothing we won’t consider,” she told shareholders in June.
Already under her leadership, HBC has decided to close 10 of its Lord & Taylor stores in the United States, including the flagship in New York, and sell its Gilt.com flash sale fashion site. Ms. Foulkes had said she was reviewing other possibilities to revive the business.
The latest deal in Europe, which is designed to turn that troubled operation around and provide much-needed cash for HBC, “reflects the fact that everything is on the table, as I said a few months ago,” Ms. Foulkes said on Tuesday. The deal also places Stephan Fanderl, current CEO of Karstadt and an experienced German retail operator, in place as CEO of the new joint venture.
According to HBC, the cash and implied asset value equate to $8.71 a share. HBC shares closed at $10.58 on the Toronto Stock Exchange on Tuesday, having fallen 16 per cent in the past 12 months. The retailer reports second fiscal quarter earnings Wednesday.
Canada’s oldest company has done several deals aimed at improving its financial picture as the bricks-and-mortar retail environment has worsened amid the explosion of online shopping.
German media have reported that job cuts numbering in the thousands are possible as a result of the deal. Kaufhof operates 97 stores while Karstadt has 80.
Ms. Foulkes said that while the latest transaction will provide savings, she declined to elaborate on potential cost cuts and job reductions. One report has said as many as 5,000 of 20,000 jobs at Kaufhof were in jeopardy if the deal went through, although an industry source said the report is inaccurate.
Edward Record, chief financial officer of HBC, told a conference call that there would be “a fair amount of synergies” to the latest European deal because the two joint-venture businesses are very similar, but he also didn’t provide details.
He said the joint venture currently foresees “limited” store closures, but once the new management team is in place it will have to look at the merged operations and “make decisions on a go-forward basis.”
Ms. Foulkes said she’s keen to focus on and strengthen HBC’s North American business, noting certain parts of it are “doing very well and still have more upside,” while others “are improving but have a ways to go.”
The European joint venture will enjoy a $464-million cash infusion, with 25 per cent coming from each of HBC and Signa and the rest coming from the sale of two properties owned by the real estate consortium led by HBC.
Sabahat Khan, retail analyst at RBC Dominion Securities, said the cash inflow from the deal is a positive for HBC because it will help reduce leverage for the retailer’s legacy retail business.
“The divestiture of a majority interest in its European operations should allow HBC management to place increased focus on the legacy North American operations,” he said in a note.
HBC has enjoyed some gains at its namesake Hudson’s Bay chain in Canada and its luxury Saks Fifth Avenue chain, based in New York but also operating in this country. However, the company has grappled with disappointing results at its Lord & Taylor chain in the United States, its discount chain Saks Off 5th, as well as its European business.