Austria’s private Signa group is well on its way to wiping out memories of the past troubles of its youthful founder René Benko. If it now wins the German Kaufhof store chain to put alongside high street competitor Karstadt, Signa’s ability to cast a successful value strategy will be a major test of its vaunted entpreneurial culture.
Signa has confirmed it has made a bid to Hudson’s Bay Co. for Kaufhof but is giving no details. Reports suggest the price is about €3bn, and that the valuation is based mostly on the property values. The bid was indeed opportune because the original objectives of HBC’s acquisition are far from being fulfilled. In fact they never got started. The surging impact of online shopping, along with some strategic mistakes, stopped the strategy in its tracks.
Let’s recall: In the 2015 deal, HBC bought Galeria Kaufhof’s 103 department stores, 16 SportsArena stores and 16 Galeria Inno locations across Belgium for an enterprise value of €2.42bn. It then sold 41 of Kaufhof’s 59 properties into a joint venture with giant US REIT Simon Property for the same amount – financing the entire acquisition. Keep in mind this was only just over two years ago. Bricks and mortar retailers still thought that the impact of Amazon and other e-tailers on market share could be contained.
Simon Property CEO David Simon was equivocal at an EPRA conference that year in answer to my question whether the deal focused on the property values rather the retail strategy. In fact what he did was to simply raise the rents on the JV’s Kaufhof portfolio. The result, according to research by the Handelsblatt newspaper: a €47m pre-tax loss in the first five months of this year. “The strategy at Kaufhof up to now targeted an increase in the property value of the department stores,” Professor Gerrit Heinemann of the Krefeld University of Applied Sciences told the newspaper. Meanwhile Kaufhof’s online business has been, “almost scandalously neglected.”
Back to Signa. It owns 79 Karstadt units, the sole department store of any size in Germany that still offers competition to Kaufhof. But for the present there is no sign that either it or Kaufhof have an internet strategy worthy of its name – which of course raises doubts if Signa’s retail arm is capable of finding a profitable strategy for both together.
According to German business magazine Wirtschaftswoche, Karstadt is also suspected of being the source of speculation that HBC has been unable to make payments on a loan against the Kaufhof stores from Stuttgart lender Landesbank Baden-Württemburg. Put this together with shareholder pressure on HBC to divest international holdings including Kaufhof from Connecticut-based Jonathan Litt’s Land and Buildings vehicle – which owns a 5% stake – and you have a most opportune bid from Signa.
One thing I think we have to give Signa: It seems to have successfully extricated itself from a poor reputation caused by Benko – who created the group out of a small Innsbrück loft conversion firm – pushing the envelope simply too far in past years. This resulted in a bribery conviction in 2012 of a Croatian official for which he was given a one-year suspended sentence – though under Austrian law the criminal record has been cleared. Partly as a result, Benko has moved out of operative involvement in Signa and stays in the background as chairman of its advisory board.
And in recent months Signa has indeed been moving from strength to strength. An announcement during Expo of a €530m forward sale from its Austrian Campus at Praterstern, Vienna, was followed by a €200m investment by the foundation of Robert Hasselsteiner, the canny founder of the German Interhyp internet mortgage intermediary – a clear vote of confidence. In October as well, Signa won the highly-respected Helaba real estate board member Jürgen Fenk for a top investment position. Fenk will also have done his own due diligence.
Signa describes itself now as a, “privately-managed entrepreneurial retail and real estate group,” comprising two core businesses Signa Real Estate and Signa Retail. But can Signa, or anyone else for that matter, construct a strategy for German department stores without massive multi-year re-investment and restructuring? €3bn is still a lot of money when high street retail everywhere in the developed world is in a peculiarly delicate state.