Germany's Metro Plans to Split to Boost Profits -- 2nd Update

By Friedrich Geiger and Eyk Henning 

BERLIN--German retailer Metro AG plans to split in two, listing its wholesale and food and consumer-electronics businesses separately in the hope of boosting their sales growth and profits, the company said Wednesday.

Metro said on Wednesday that no final decision has been taken on a demerger which would require approval from stockholders though the plan has the support of senior management and the group's main shareholders.

Investors reacted enthusiastically to the proposal, with shares in Metro rising more than 13% in early afternoon trading on the Frankfurt bourse, boosting the group's market capitalization to around EUR9.09 billion ($10.30 billion).

Metro has been struggling with declining revenues and volatile profits for the past five years, along with the complexity of its sprawling operations.

Chief Executive Olaf Koch has attempted to tackle the issue in recent years by divesting some businesses, including by selling department-store chain Galeria Kaufhof to Canada's Hudson Bay Co. in 2015. He has also exited some Asian operations.

But the current plan of splitting the company in two parts, which requires approval from the supervisory board and shareholders, is the most dramatic move Metro has undertaken to simplify its empire of more than 2,000 wholesale food stores, supermarkets and electronics outlets located throughout Europe, Asia and Africa.

Annual revenue at the electronics business was EUR21.7 billion for the 12 months ended September 2015, while revenue at the food operations exceeded EUR37 billion.

The split could also shield investors in Metro's wholesaling and supermarket business from a long-running dispute over strategy at the consumer-electronics unit. The unit, which trades under the Saturn and Media Markt brands, is part owned by Media Markt's billionaire founder Erich Kellerhals, who has clashed for years with management over day-to-day operations and longer-term strategy.

While Metro plans to retain its 80% stake in the consumer-electronics unit, held via holding company, the wholesale business and supermarkets would be spun off as a separate entity with a new name, the company said. Shareholders would receive shares in the new company in proportion to their existing stake in Metro.

"I feel very strongly that a split in two independent and focused businesses would be in the best interest of all stakeholders, as it would facilitate a significant opportunity for faster and more profitable growth," said Jürgen Steinemann, Chairman of Metro's supervisory board.

The group's three main shareholders--Franz Haniel & Cie. GmbH, the Schmidt-Ruthenbeck family and the Prof. Otto Beisheim foundation --support the plans, Metro said.

"We will closely monitor further actions, but don't think the transaction will affect our rights as a shareholder in the Media-Saturn holding company," a spokesman for Mr. Kellerhals said.

Metro's Mr. Koch said Mr. Kellerhals "has no potential to interfere with this transaction" because the split takes place at the group level, where Mr. Kellerhals isn't a major shareholder.

He added that the two businesses--food and electronics--are so different that they would be easier to steer if they were independent.

A split could also open new doors to future mergers and acquisitions, while giving investors a choice of which part of the existing Metro business they wanted to invest in, Mr. Koch said. A demerger would likely create new jobs, rather than lead to job losses because both businesses should experience new growth, he said.

Some analysts were less sure about the prospects for the stand-alone businesses. Metro faces tough trading conditions, notably in important foreign markets like Russia, whose economy is shrinking, and China, where growth has slowed recently, said brokerage firm Market Securities.

Mr. Koch, who said the company would like the listings to be completed by mid-2017, would likely run the wholesale and food unit. Pieter Haas, chief executive of the Media Markt-Saturn unit and a management board member of Metro, would likely run the consumer-electronics business, Metro said.

The company has retained investment bank J.P. Morgan Chase to advise on the transaction, a person familiar with the matter said.

Write to Friedrich Geiger at [e-mail]

Corrections & Amplifications

Erich Kellerhals is the founder of German consumer-electronics retailer Media Markt. In a previous article, Mr. Kellerhals was mistakenly referred to as a founder of its parent company, retail group Metro AG.

(END) Dow Jones Newswires

March 30, 2016 10:18 ET (14:18 GMT)

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