DEALTALK-Spendthrift German consumer may stall Metro disposals

Fri Jul 1, 2011 10:12am BST

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* IPO eyed for Kaufhof given lack of buyers

* Financial investors seen possibly interested in Real

* German retail sales fall unexpectedly in May

By Victoria Bryan

FRANKFURT, July 1 (Reuters) - Growing fears over the strength of Germany's consumer recovery could hamper efforts by Metro (MEOG.DE), the country's largest listed retailer, to offload its Kaufhof department stores and Real hypermarkets.

Metro has long been looking for a way out of its Kaufhof and Real businesses to focus on opprtunities offered by emerging markets at its cash & carry and MediaMarkt-Saturn electronics businesses.

Disposals are now back on the agenda after the group said it was in informal talks over their future. [ID:nLDE75Q0G6]

The biggest problem when it comes to finding a buyer is the two units' exposure to their home market. Kaufhof is virtually unheard of outside of Germany, while Real gets two thirds of its sales from Germany.

While Germany is Europe's strongest economy, it does not offer the growth rates of emerging markets such as Russia and China, where Metro is driving expansion of its cash & carry outlets and MediaMarkt-Saturn stores.

In addition, German retailers' good start to the year may be losing steam. Despite low unemployment and predicted economic growth of 3.3 percent this year, retail sales fell unexpectedly in May, though economists said an E.coli outbreak that led to a drop in food sales was a major factor. [ID:nLDE75T08M]

One banking source said Metro was looking at floating Kaufhof due to a lack of suitable buyers, adding an initial public offering would take many months.

One analyst who did not wish to be named said: "I would not expect anything soon", adding he suspected Real's German business was worth nothing, with most of Kaufhof's value being its prime city centre real estate.

BURNT FINGERS

For a while, Metro was keen to merge its Kaufhof department stores with those of local rival Karstadt, but chief executive Eckhard Cordes said in May he had given up trying to persuade Nicolas Berggruen, who rescued Karstadt from insolvency in 2010, of the merits of the plan. [ID:nLDE74E0GZ]

JP Morgan analysts said a management buyout was an option for Kaufhof. "Using the existing Kaufhof chain as a cash cow to build a portfolio of brands seems an interesting way to go for us," they said in a note.

With domestic rivals out of the picture for Real for antitrust reasons, and international players like Wal-Mart (WMT.N) having had their fingers burnt once by a German food market dominated by discounters like Aldi and Lidl, a financial investor might make more sense.

"Wal-Mart probably can earn a lot more money, much easier elsewhere, simply by keeping expanding in China, India and Africa," Planet Retail analyst Boris Planer said.

"What looks likely is Real being acquired by a financial investor who then may or may not float Real on the stock exchange with a growth perspective towards eastern Europe."

Estimates for the value of the two businesses vary wildly -- from 3.0-7.7 billion euros ($4.3-$10.9 billion).

Offloading one or both of the two units could, however, boost Metro's shares which have lost almost a quarter of their value this year, by cutting its exposure to Germany.

The shares currently trade on 10.2 times estimated full-year earnings, compared with 13 for French group Carrefour (CARR.PA) and an 11.3 multiple for Wal-Mart, according to Thomson Reuters Starmine.

Pulling off a deal could also provide a shot in the arm for Cordes, who regularly gets asked at press conferences if he is going to retire when his contract comes up for renewal in 2012.

(Additional reporting by Philipp Halstrick, and Mark Potter in London; Editing by Dan Lalor)

($1 = 0.7062 euro)

((victoria.bryan@thomsonreuters.com; +49 69 7565 1235; Reuters Messaging: victoria.bryan.thomsonreuters@reuters.net)) Keywords: METRO/

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