Metro Restructuring Not Cleaning House

Shareholder pressure is mounting on the chief executive of German retail group Metro, one of Europe's largest, to improve results and complete a reorganization that may include selling the Kaufhof department store chain.
Olaf Koch, chief executive of retail group Metro, has shown he's also able to sell a whole chain of stores.

It was Olaf Koch's first decision as the chief executive of Metro — and it was a big one.

On January 17, 2012, only a few days after taking over Germany’s biggest retail business group, he suspended talks on selling Kaufhof, one of its struggling department store chains.

Since then, the plan to sell Kaufhof's 136 stores has been frozen.

But three years on, the calls to sell Kaufhof are growing louder.

In August, Signa Holding, a group owned by Austrian real estate investor René Benko, took over Kaufhof's ailing competitor, Karstadt.

The restructuring of Karstadt, to which Mr. Benko is devoting one to two years, may very well be only a step on the way to a merger with Kaufhof under the leadership of Signa.

Analysts are also looking for a solution for Kaufhof.

“At the moment, I don't see any other catalyst for the share price than getting rid of Kaufhof,” said a fund manager, Ingo Speich from Union Investment.

“Currently Metro is neither a growth story nor a dividend story,” Mr. Speich said. “The question that Mr. Koch must answer in his second term of office is: Where does Metro want to go? Where does the company intend to grow?”

Mr. Koch has unfortunately had lots of bad luck recently. I almost feel pity for him. Jella Benner-Heinacher,, German shareholder lobby group DSW

Metro, a group formed in 1996 with the merger of several retail chains, has been in a restructuring for a few years to divest underperforming operations and increase online sales, but investors want quicker results.

The contract of the 44-year-old head of Düsseldorf-based Metro, which would have ended in September, has been renewed for a further three years. That gives him time to complete the company's restructuring, which involves all of the group’s operations, in addition to department-store chain Kaufhof.

First, there is Media-Saturn, Europe's largest consumer-electronics retailers owned by Metro. Mr. Koch has taken on the restructuring of the two chains Media-Markt and Saturn, but both are still considered to be undervalued. Price pressure is extreme in the sector, with much online competition.

Mr. Koch has rejected the possibility of separating Media-Saturn-Holding from Metro. There has been repeated speculation on this issue in relation to the power struggle with minority shareholder Erich Kellerhals. In recent months, this conflict has quieted down — but it has not gone away.

 

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Second, results at supermarket chain Real are up for improvement. The grocer has sold its business in eastern Europe, but from the perspective of fund manager Mr. Speich, the remaining 300 stores in Germany are a “permanent construction site.”

“They are practically unsellable. But it doesn't hurt Metro too much to carry them along,” said Mr. Speich. Moreover, Real's loss carry-overs are advantageous to the parent company in terms of taxes, he said.

Third, there is Metro’s wholesale business chain Cash & Carry, which sells under the brand names Metro or Makro. The wholesaler, active in Europe and Asia with 750 stores, has the highest sales and profits of Metro Group’s four operating units. Some see the Cash & Carry chain, which was founded in 1964 and forms the origin of Metro, as the group’s only future.

After Mr. Koch sold Cash & Carry operations in several countries, including Vietnam, Denmark and Greece, he must open up new markets. From 2016-17, the time should be ripe. Africa is on the target list. Mr. Koch also sees opportunities in the Middle and Far East.

“For years now, Metro has been stuck in restructuring,” criticized Jella Benner-Heinacher from a German shareholder lobby group, DSW. “But we also take note of the progress that Mr. Koch has made.” He is credited with returning the focus to customers and putting a stop to the decline in revenues on existing floor space.

The company has some catching-up to do on the Internet, but progress is being made. In 2013-14, online business contributed 2.4 percent of total revenues, or €1.5 billion. That's not much, but it is a third more than the year before. The delivery service in the wholesale business meanwhile contributed €2.8 billion (9.1 percent) and the Cash & Carry product offering has been updated.

The share price, which had intermittently sunk to almost €20 after Mr. Koch's arrival as chief executive in 2012, is back at the level of €30. Nonetheless, many stockholders are discontented. “For years, Metro's performance has not been what we would have liked,” Stephan Gemkow, managing director of Metro shareholder Haniel, has said repeatedly.

Mr. Gemkow heads the family-owned investment firm Haniel which is Metro’s largest shareholder, owning 30.01 percent. Metro is dangerously overrepresented in the portfolio of the Duisburg-based company. So a sale of Kaufhof would certainly be applauded by Mr. Gemkow as well.

“Mr. Koch has unfortunately has had lots of bad luck recently,” stated Ms. Benner-Heinacher from shareholder group DSW. “I almost feel pity for him.”

Metro's biggest problem is Russia. First, Mr. Koch had to postpone indefinitely the planned flotation of the Russian Cash & Carry operations. The value of the ruble versus the euro and U.S. dollar have also become a burden. “At the moment, Metro's stock price is more dependent on news from the Ukraine crisis than from its own figures,” says Christoph Schlienkamp, an analyst at Bankhaus Lampe.

What counts for stockholders, however, are Metro’s share price and its dividends. In the short fiscal year 2013, shareholders ended up empty-handed for the first time since the company went public in 1996. For the fiscal year 2013-14, Metro has proposed a dividend of €0.90 per share. “That's better than nothing, but it is no compensation for the weak share price,” says Mr. Benner-Heinacher. “We continue to await the sale of Kaufhof.”

 

Kirsten Ludowig is an editor with Handelsblatt's 'companies and markets' department, specializing in the trade sector. Gilbert Kreijger, an editor with Handelsblatt Global Edition, contributed to this article. To contact the author: [email protected]