BUSINESS

Hudson's Bay Co. Buys Galeria Kaufhof, German Department Store Chain

06/15/2015 07:20 EDT | Updated 06/15/2016 05:59 EDT
TORONTO - Hudson's Bay Co. (TSX:HBC) is taking another step towards becoming a global retailing empire with a $3.36-billion deal to buy German department store chain Galeria Kaufhof and Inno, its Belgian subsidiary.

The Toronto-based retailer views the deal as a platform for further growth beyond its North American base, where it owns the Hudson's Bay department stores in Canada, the Lord & Taylor chain of department stores in the United States and as well as Saks Fifth Avenue — a globally recognized luxury retail brand acquired in 2013.

"We believe there's an opportunity in both Germany and Belgium to roll out Saks Fifth Avenue and Saks Off Fifth," Richard Baker, HBC's governor and executive chairman, said Monday in a phone interview from Cologne, Germany

However, Baker said the primary goal is to increase revenues at Kaufhof's existing stores and "we're not even aggressively looking to add stores to our existing portfolio here."

Under an agreement with Germany's Metro Group, HBC will take over 103 Galeria Kaufhof stores in Germany, including 59 properties in prime inner-city locations, as well as 16 Sportarena stores, 16 Galeria Inno stores in Belgium, various logistics centres, warehouses and other properties, and the Galeria Kaufhof head office in Cologne.

Baker says Kaufhof's current management will remain in charge but noted that Hudson Bay stores in Canada have experienced same-store sales growth of 20 per cent over the past four years.

"It's the strongest growing department store in the world and we believe the expertise that we have there could be helpful to the existing management team in Germany and Belgium," Baker said.

In response to analysts who have warned of the risks involved with moving into a culturally different market, often citing Wal Mart's withdrawal from Germany, Baker said "people like to throw stones but we think that we're on a very strong course."

RBC Capital Markets analyst Sabahat Khan said in a Monday research note that there is significant growth potential in the German retailer's online storefront, noting that e-commerce accounted for only two per cent of Kaufhof's sales in its 2014 fiscal year.

Baker said HBC has sucessfully integrated and mixed in-store, online and mobile sales with an "omnichannel" approach.

"That combination, frankly, makes us a greater competitor to companies like Amazon or companies that only have an online offering," Baker said.

The companies' joint agreement says HBC has made "extensive commitments" to maintain employment levels and store count, and for Galeria Kaufhof to remain headquartered in Cologne.

The company estimates its eight main banners, operating in four countries, will generate about C$13 billion in revenue annually. That would be up 59 per cent from $8.2 billion in the year ended Jan. 31, 2015, when HBC reported a $238-million profit.

However, much of the Kaufhof transaction's value is tied to real estate.

In a side deal announced several hours after the deal with Metro, HBC said a U.S. joint venture set up previously with Simon Property will buy at least 40 of Kaufhof's properties for at least $3.3 billion, subject to certain conditions.

Baker said that means Hudson's Bay Co. will acquire the Kaufhof business without issuing additional shares and with little or no additional debt on its balance sheet.

Hudson's Bay shares jumped eight per cent Monday morning at the Toronto Stock Exchange, gaining $2.01 to $26.01 after 90 minutes of trading.

Metro AG had said months ago it wanted to divest Kaufhof to focus on its Metro Cash & Carry business, the Media-Saturn consumer electronics chain and its Real hypermarket.

HBC had been challenged by a rival deal from Austrian investor Rene Banko, which owns another Germany chain called Karstadt.

"Beyond the attractive financial and transactional aspects, a key factor for us was the fact that HBC has made binding guarantees to take on the approximately 21,500 Galeria Kaufhof employees in Germany and Belgium," said Olaf Koch, chairman of Metro's management board.

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Note to readers: This is a corrected story. An earlier version valued the deal at $3.9 billion.