(Reuters) – Signa Holding GmbH, the Austrian property and retail group that owns German department store operator Karstadt, sent Hudson’s Bay Co (HBC.TO) this week details of the financing it has put together for its 3 billion euro bid ($3.5 billion) for Kaufhof, Germany’s largest retail chain, owned by Hudson’s Bay.
Hudson’s Bay, which also owns the Saks Fifth Avenue luxury department store chain, had said last week it would review Signa’s offer for Kaufhof, but also called it incomplete, non-binding and unsolicited, with no evidence of financing.
Signa gave Hudson’s Bay a copy of a financing commitment letter from Austrian Raiffeisen Bank International AG for 700 million euros, which, together with a capital increase by Signa last month and the assumption of a 1.34 billion euro real estate loan from German bank LBBW tied to Kaufhof, fully accounts for the Kaufhof bid consideration, according a letter from Signa to Hudson’s Bay dated Nov. 6 and reviewed by Reuters.
Privately held Signa also sent Hudson’s Bay confirmation of its bank account balance and a letter from accounting firm KPMG confirming that Signa’s retail arm has 400 million euros in available liquidity and more than 650 million euros of unconditional capital commitments from its shareholders, according to the letter.
Signa confirmed the letter but offered no additional comment. A Hudson’s Bay spokesman did not provide any immediate comment.
Hudson’s Bay shares rose as much as 4 percent on the news and were up 3.6 percent at C$12.38 in Toronto on Tuesday afternoon, giving the company a market capitalization of C$2.2 billion ($1.7 billion).
In the Nov. 6 letter to Hudson’s Bay, Signa’s founder and chairman Rene Benko said his company believed it can complete the necessary due diligence to put together a deal for Kaufhof in two weeks, should Hudson’s Bay decide to engage in negotiations. He said there was no need for a deal to be subject to any financing conditions, given that Signa had the funds required.
Signa tried to buy Kaufhof in 2015, but Hudson’s Bay outbid it by paying 2.5 billion euros including debt for the German chain and its Belgian subsidiary. Since then, Kaufhof’s finances have deteriorated, to the point where vendors are finding it more difficult to find trade credit insurance to make shipments.
Hudson’s Bay financed the acquisition of Kaufhof by using a joint venture that acquired Kaufhof’s real estate and became its landlord. Hudson’s Bay kept a 63 percent stake in the joint venture, and sold the rest to other major investors, including Simon Property Group Inc (SPG.N).
This financial engineering backfired, as Kaufhof struggled to cope with the higher rents the joint venture imposed, as well as declining foot traffic in stores. Kaufhof is now trying to convince labor unions in Germany to accept steep pay cuts, a tough ask ahead of the holiday shopping season.
Karstadt, on the other hand, rents its store space from landlords not affiliated with Signa, after Signa saved it from bankruptcy in 2014 by agreeing to acquire it for the nominal consideration of 1 euro.
Following the acquisition of Karstadt, Signa turned the department store chain around by eliminating 3,000 staff and closing three unprofitable stores, rebalancing its offerings to remove unpopular merchandise, and streamlining its logistics and e-commerce operations.
Karstadt, the second biggest department store operator in Germany, now holds $320 million in cash and no debt. It went from posting losses before interest, taxes, depreciation and amortization of 85.8 million euros in 2014, to being on track to reporting 87.5 million euros in earnings before interest, tax, depreciation and amortization in 2017.
INTEGRATING KAUFHOF AND KARSTADT
Kaufhof has 99 department stores in Germany, while Karstadt has 79. Although Signa sees some overlap between the two in 26 locations, it has not yet decided exactly how it would integrate the chains should its bid succeed, according to two sources familiar with the matter who requested anonymity to discuss confidential deliberations.
Thanks to both its retail and real estate operations, Signa expects to generate an after-tax net profit of approximately 1 billion euros this year, Benko said in the letter. The net asset value of Signa’s holdings is 5.5 billion euros, according to the letter.
Hudson’s Bay said last month it would raise C$1.6 billion through the divestiture of its Lord & Taylor flagship building in New York and an equity investment in Hudson’s Bay by private equity firm Rhone Capital. Last week, it also said a joint venture between Hudson’s Bay and RioCan Real Estate Investment Trust (REI_u.TO) was exploring the sale of Hudson’s Bay’s flagship store in downtown Vancouver.
Selling Kaufhof would release Hudson’s Bay from its liabilities and provide an infusion of cash into the loss-making company at a time when retailers throughout North America are being squeezed by price competition from e-commerce retailers such as Amazon.com Inc (AMZN.O).
Activist hedge fund Land & Buildings Investment Management LLC, which has been pressuring Hudson’s Bay to consider asset sales, said last week it was unclear what additional evidence Hudson’s Bay would expect at this stage regarding Signa’s ability to finance the Kaufhof transaction.
Reporting by Greg Roumeliotis in New York; Editing by Phil Berlowitz