Yesterday, Arcandor filed for bankruptcy at a court in Essen, Northrhine-Westphalia. The holding company announced that its subsidiaries Karstadt Warenhaus, Primondo (which is the head of the group’s mail-order operations) and Quelle are also seeking protection under the German bankruptcy code. Arcandor’s move excludes the group’s profitable tourist operations under the Thomas Cook helm, the specialty mail-order businesses of Primondo, and HSE24, the TV shopping branch of Arcandor.
The company emphasizes that all business units continue to be operating, that the salaries of all 43,000 concerned employees are secured through August, and that the major shareholders, Madeleine Schickedanz and the private bank Sal. Oppenheim, have expressed their clear commitment to Arcandor.
The bankruptcy also affects the 27 Karstadt Sports stores and the 68 Karstadt department stores that run a department for sporting goods. The annual sales of sporting goods in the entire Arcandor group are estimated at some €540 million, of which the sales of the specialty sports stores and the department stores are a little below €400 million. This makes it the largest integrated sporting goods retailer in Germany, like El Corte Inglés previously in Spain.
Various factors made the retail giant’s dramatic step inevitable: First, short-term loans worth some €710 million are due on June 12. The company has been scrambling to come up with the funds in the past days and weeks. Second, the government refused to help out, stating that the shareholders should be the first to put money into the troubled group. Third, these shareholders did not make their precise rescue plans public. Fourth, potential new partners, led by the Metro Group, did not come to an agreement to rescue Arcandor at the last minute, shifting the problem to Arcandor’s suppliers and other creditors.
On Monday, the so-called “steering committee” of “Deutschlandfond,” the government’s triple-digit-billion fund aimed at rescuing companies that are affected by the global financial crisis, refused to put money into Arcandor. The company had already halted payments for the rents of Karstadt’s leases then.
With this step, the German government shared the point of view of the European Commission, which stated last week that Arcandor’s problems are not a result of the current crisis. Instead, Arcandor’s difficulties are by far older than July 1, 2008, which is the fund’s definition of the starting point of the global crisis. A few hours after that determination, it was announced that the government had rejected Arcandor’s application for an “emergency loan” that would have been handled through KfW, a state-run bank in charge of supporting privately owned companies. The refusal was not 100 percent definite on Monday, because such a loan is connected to certain conditions such as the existence of serious talks with potential buyers of parts of the group as well as with the major shareholders. Arcandor admitted that it could not meet all the conditions imposed by Berlin, which was the immediate reason to go to court.
Arcandor’s situation was dramatic and chaotic over the weekend for various reasons. First, the retailer counted on a public bail-out, but the political class was acting under the pressure of Sunday’s elections for the European Parliament. Angela Merkel, the chancellor, and her party, CDU, survived this vote not necessarily as a winner, but at least not as a major loser. Merkel, however, was clear on Arcandor even before the elections: no governmental help without the commitment of the shareholders. She called for a solution without governmental intervention. This means first that the current major shareholders are required to help and that some competitors who might acquire parts of the huge retailer should speed up to get to terms with Arcandor. It is safe to say that suppliers from the industry are also being asked to contribute something to keep the giant alive.
As far as the shareholders are concerned, every Karstadt employee is counting on Madeleine Schickedanz, the heir of Quelle, Arcandor’s mail-order branch. She is a major shareholder of Arcandor together with Sal. Oppenheim, a private bank. The two parties control some 60 percent of Arcandor’s shares. Even though Schickedanz, the former majority shareholder, has reduced her own shares over the past years, she has always been ready to give some of her own money to the company formerly known as Karstadt-Quelle.
Contrary to her habits, Schickedanz – who holds 26.7 percent of the company – informed the press about her thoughts today. She said that she regretted the bankruptcy and stated that she stood behind Arcandor with all her own money to an extent beyond what is usually manageable. According to the Forbes magazine, the 65-year-old is worth some $1 billion, as of March 2009, even though she must have lost some cash due to the development in the price the Arcandor’s shares, whose trading was halted yesterday at some €0.70. Sal. Oppenheim said that it deeply regrets the insolvency, but said that it can manage the procedure through write-offs. Both major shareholders confirmed that they would stick to their commitment to Arcandor.
A possible long-term solution for Arcandor might be the dismemberment of the group. Thomas Cook, the largest of Arcandor’s companies, is the most profitable and could be interesting for potential investors. And the company’s competitors are already circling. The Otto Group leaked the information that it might be interested in some parts of the Quelle operations, but it was apparently unwilling to take action until Arcandor filed for insolvency. In the meantime, it has become known that it is Karstadt Sports that Otto is after. Otto may have some interest in parts of Arcandor at various levels: First, Quelle is its major competitor in the country as far as full-range mail-order catalogs are concerned. Second, the Otto Group is active in the sporting goods sector not only because of its own sales by catalog and on the internet, but also through its ownership of SportScheck, Germany’s largest specialty retailer, and Frankonia, the big one in specialty hunting retail.
Both Otto and Scheck are members or buying partners of Intersport. Intersport has criticized Karstadt for years – especially for slashing prices - and Intersport’s arch-rival may then become a member of the family. Otto’s acquisition of Karstadt could mean an increase of Intersport’s centralized invoicing by up to €200 million a year.
The key player in this drama, however, is the Metro Group, which has frequently suggested a merger of Karstadt with its own department store subsidiary, Galeria Kaufhof, to form Deutsche Warenhaus AG (“German Department Store Inc.”). A possible merger was again discussed in Munich on Sunday under obscure circumstances: Metro announced that negotiations were progressing as far as a rescue/merger plan was concerned, but withdrew the same communication just half an hour later.
Major issues of the ongoing negotiations have been the valuation of Karstadt, the leases for the real estate of its stores and the question of how many doors should be closed. According to Metro, the group thinks that 30 Karstadt and 10 Kaufhof department stores might be closed due to underperformance and/or local overlaps between the two chains. Kaufhof’s sales of sporting goods (excluding other Metro operations) are estimated at €485 million (source: Intersport). This figure includes the sales of the 13 Sportarena specialty outlets.
Arcandor’s position is particularly uncomfortable because Germany is facing a so-called “Superwahljahr” (“super electoral year”): After last weekend’s vote for the European Parliament, several state parliaments are to be re-elected as well as the municipalities in a couple of states; then in September, Germany will elect a new federal parliament, which will decide Merkel’s political fate. Arcandor has been trapped in this political environment because its case divides top politicians and backbenchers in each party. Demonstrations were reported yesterday in connection with its bankruptcy. Arcandor was hopeful to receive public money after Opel, the German car manufacturer owned by General Motors, was rescued by governmental intervention in late May because it was regarded as a “special case.”
Merkel’s major concern is being re-elected in September. The chancellor, who heads a so-called grand coalition of CDU, her own party, and the social democrats, aims to remain chancellor, but in the best case by driving her left-wing partner out of business. Merkel’s goal is to team up with FDP, the smaller liberal party, which she would badly need to have a majority in the parliament. FDP, however, strictly opposes public money for everybody. In quite a populist way, the party refuses to grant support to troubled companies that just use the financial crisis as an excuse for bad management. Instead, the liberals act as the advocates for the small and medium-sized enterprises that do not enjoy governmental money.
In fact, Merkel’s CDU won the European elections. The Christian democrats lost some 6 percent of the voters, but managed to keep the social democrats in check who continue to be at a paltry level of some 21 percent. The small liberal party was a winner, which would make a majority of conservatives and liberals possible in September. The message of all that is that German voters do not necessarily see that the rescue of this and that company – such as Arcandor – should be on top of the government’s agenda.
This is actually the card that the local sports retail organizations are playing. In an open letter to Karl-Theodor zu Guttenberg, the German minister for economy, both Intersport and VDS, the German federation of sporting goods retailers, strongly opposed any public support for Karstadt. Zu Guttenberg himself is a clear champion of governmental non-interventionism. The letter signed by Klaus Jost and Werner Haizmann, the presidents of the respective organizations, argues that the department store chain’s price policy is mainly the reason for its financial problems. A possible triple-digit warranty for Arcandor would be considered as an act of unfair competition to the disadvantage of the smaller and medium-sized companies that Intersport and VDS represent.
