Hudson's Bay Co. is looking to introduce its upscale Saks Fifth Avenue chain in Europe following its $3.36-billion deal to buy Germany-based Galeria Kaufhof.
The agreement for Kaufhof, which was announced on Monday, gives HBC governor Richard Baker a springboard to explore taking Saks and its discount Off 5th chain abroad as well as other potential acquisitions on the continent.
"There is an opportunity to bring Saks Fifth Avenue and Saks Off 5th to Germany," Mr. Baker, also HBC's executive chairman, said in an interview. "We are investigating that and we will be working with the existing management team to see what their thoughts are, and then we will be testing it."
HBC's deal for the top German department-store retailer underscores the mission and challenge for Mr. Baker, a U.S. real estate tycoon.
The proposed takeover deal, worth $3.9-billion in total, including the assumption of pension liabilities, taps into his goal of snapping up retailers whose operations HBC can boost, while taking advantage of, the value of their real estate. His test now is to show that HBC can execute its formula in a retail market such as Germany, which is vastly different from the North American scene that is home to the Canadian retailer, while moving to expand further abroad.
"Kaufhof is not only expected to provide a strong starting position for future growth in Europe, but the company has also identified a number of opportunities to further improve operations at Kaufhof," Sabahat Khan, an analyst at RBC Dominion Securities, said in a note.
Investors seemed to applaud the deal, which is set to close later this year. HBC shares jumped $1.89, or almost 7.9 per cent, to $25.89 on the Toronto Stock Exchange.
Jerry Storch, chief executive officer of HBC, said the latest acquisition "is a significant step forward in our plans to become a premier international retailer." Expanding HBC's footprint into Europe with Kaufhof "provides us with a strong foundation to explore additional opportunities for growth throughout the continent."
With the Kaufhof acquisition, HBC will operate a total of 464 stores with about 44 per cent of sales generated in the United States, 31 per cent in Germany, 23 per cent in Canada and 2 per cent in Belgium, along with e-commerce at HBC and Kaufhof. HBC's overall sales will increase about 50 per cent to $13-billion.
Under the deal, Toronto-based HBC gets its hands on some prized real estate properties. It also announced an agreement in principle with Simon Property Group, its U.S. real estate partner, to purchase at least 40 of Kaufhof's owned or partly owned properties for at least $3.3-billion.
The proceeds of the Kaufhof-Simon real estate agreement are expected to largely finance the takeover itself, HBC said. As a result, the retailer – which operates Hudson's Bay department stores in Canada and Saks and Lord & Taylor in the United States – doesn't intend to issue equity and expects to incur limited additional debt, it said.
The latest agreements are expected to be "significantly accretive" to HBC's earnings per share without requiring any "synergies" or cost savings from the merger itself, the company said. It expects to generate more than $200-million of incremental adjusted earnings before interest, taxes, depreciation and amortization, and to reduce its debt, the company said.
Mr. Baker said HBC will consider putting Saks in the same buildings as Kaufhof.
He said HBC started to study Kaufhof in December, 2006, being drawn to it as the dominant department-store player in Germany – with a weak archrival – and the only one in Belgium. He said it was similar to what he saw in mid-market HBC when he headed a group that took it over in 2008.
"What's different is that the management and the quality of those stores at Galeria Kaufhof are better than what we inherited when we bought the Hudson's Bay Co.," he said. HBC owned about 12 "trophy downtown department stores" while Kaufhof owns more than four times that number of "high-quality, city-like department store buildings.… There is a tremendous value in the owned real estate portfolio."
Industry observers have warned that other retailers, including giant Wal-Mart Stores Inc., have suffered in Germany, which is a highly unionized and mature retail market. But Mr. Baker countered that Wal-Mart bought a low-ranked retailer in Germany and installed an all-American management team. "That has no parallel to us coming in and buying the dominant, No. 1 German department-store chain and having the existing German management team continue to run it."
He said HBC has pledged to keep the Kaufhof staff, management and stores in place for three years, noting other foreign retailers, such as U.S. discounter TJX Cos., have fared well in Germany and Europe. "We are on a level playing field with every other retailer in Germany," Mr. Baker said.
HBC's bid won out over that of Vienna-based Signal Retail because of HBC's stronger blueprint for growth and investment, without plans for job losses, an industry source said. The competing offer intended to combine Kaufhof and second-ranked Karstadt, leading to inevitable job losses, the source said.
Mr. Baker has said he was looking for international expansion opportunities. In late 2013, HBC acquired Saks Inc. for $2.4-billion (U.S.). It will open its first Saks Fifth Avenue stores in Canada next year.
Mr. Baker has showed his real estate savvy in a string of deals tied to HBC. In February, the retailer said it was teaming up with two real estate giants – one in Canada and one in the United States – to create new companies valued at $4.2-billion (Canadian), paving the way to take them public or for some other deal.
In 2011, three years after acquiring HBC, Mr. Baker sold most of the company's Zellers leases to U.S. rival Target Corp. for $1.8-billion – more than the roughly $1.1-billion HBC purchase price.
Last year, HBC sold its flagship Toronto Queen Street store and office building to Cadillac Fairview Corp. for $650-million.
Late last year, HBC also revealed that its iconic Manhattan Saks Fifth Avenue store was valued at $3.7-billion (U.S.), according to an independent appraisal, which is more than the $2.4-billion purchase price of the entire Saks chain about a year earlier.