BERLIN (Reuters) - Hudson’s Bay Co (HBC) (HBC.TO) and Signa Holding agreed on Tuesday to merge Germany’s Galeria Kaufhof and Karstadt chains to form Europe’s third-biggest department store chain as they battle online rivals, sending HBC shares surging.
The combined group will have annual sales of around 5.4 billion euros ($6.3 billion), putting it behind Spain’s El Corte Ingles and Britain’s Marks and Spencer (MKS.L), market research provider Euromonitor International data shows.
Austria’s Signa will hold a 50.01 percent stake in the combined retail company to be created by the merger, with HBC possessing the rest. The group will have 243 stores in Germany, Belgium and the Netherlands and employ some 32,000 people, the two companies said in a joint statement.
Amazon’s (AMZN.O) advance in Germany, its second-biggest market after the United States, has come at the expense of groups such as Kaufhof and Karstadt, while online fashion retailer Zalando (ZALG.DE) has taken a chunk of spending on shoes and clothes.
Hudson’s Bay shares jumped as much as 10.1 percent to an eight-week high on Tuesday, and were trading up 9.1 percent at C$11.76 at 11:21 a.m. ET.
Department stores emerged in the 19th century after the advent of mass manufacturing, but have fallen on hard times as consumers hunt for bargains online.
The German retail association (HDE) expects online sales to rise by 10 percent this year, compared to a forecast for just 1.2 percent growth for over-the-counter sales.
And while record-high employment and above-inflation pay hikes have helped household spending become the main driver of German growth, Kaufhof and Karstadt have failed to benefit.
“The German market is challenging, but the joint venture gives us a roadmap to reach profitability, and offers us a well-capitalized business,” HBC Chief Executive Helena Foulkes told Reuters.
She declined to give details on possible job cuts or store closures.
Under the deal, Hudson’s Bay will receive 411 million euros in net proceeds for selling part of its German real estate assets to Signa. HBC said it will use the proceeds to reinvest in the new joint retail business and pay down debt.
“The divestiture of a majority interest in its European operations should allow HBC management to place increased focus on the legacy North American operations,” Sabahat Khan, analyst at RBC Dominion Securities, said in a note.
Signa will manage the day-to-day operations of the retail business, which will be led by Karstadt Chief Executive Stephan Fanderl, who will have to tackle growing online sales.
Signa owner Rene Benko bought Karstadt in 2014 and returned it to profitability in the last financial year by making cuts but also giving its stores more of a local flavor, teaming up with partners and promoting e-commerce.
Hudson’s Bay bought Kaufhof in 2015, hoping to make it the center of its European expansion. But the company is battling its own losses and a campaign by activist investor Land & Buildings to boost its share price by extracting value from its real estate holdings.
Jonathan Litt, founder of hedge fund Land & Buildings, urged HBC’s board to “remain vigilant in monetizing assets,” including the sale of the remaining interest in the European businesses.
HBC said the merger valued the German real estate assets at 3.25 billion euros, compared to the 2.51 billion euros it paid for Kaufhof in 2015.
German union Verdi said there was still place in Germany for two department store chains and warned the companies against “cashing in” on prime real estate in inner cities. ($1 = 0.8607 euros)
Additional reporting by Emma Thomasson in Berlin, Matthias Inverardi in Dusseldorf and Greg Roumeliotis in New York and Nichola Saminather in Toronto; Editing by Maria Sheahan, Keith Weir, Alexander Smith and Will Dunham