April 7, 2016

What Metro could learn from Jimi Hendrix

Jimi Hendrix (photo: Dieter Klar/dpa-Bildarchiv)
Jimi Hendrix: "Castles made of sand"
It was only Wednesday last week that German retail giant Metro Group announced its intention to split into two by mid-2017. Its Metro Cash & Carry and "real,-" hypermarket subsidiaries, representing around two-thirds of annual group revenues (€58bn) in 2014/15, are to be spun off in an independent unit which will seek a separate listing. Meanwhile, electronics retailer Media-Saturn will stay part of the Metro Group.

The news of the demerger upped the share price by more than 12 per cent on the day, providing a welcome fillip for long-suffering shareholders. Since then analysts in the City of London have bombarded their clients with research papers containing likely scenarios for the future. Clearly the financial community are suckers for any kind of story – much as wide-eyed children are entranced by thimble riggers at a funfair.

Perhaps, though, these highly-paid experts, who pride themselves on the sophistication of their valuation techniques, should take a more sober view of future prospects. However parent company Metro may repackage its progeny, the new entities will not suddenly become something totally different.

A real chance for real,-?

Real store (photo: real,-)
A real,- hypermarket in Germany
Real,- remains a disparate bundle of hypermarkets in a late stage of their store development cycle. Profits are lacklustre and probably depend to a significant extent on real estate revenues. For years it has not been possible to interest private equity or strategic investors in huge chunks of greenfield concrete in an increasingly cyber age. Presumably, this is why Metro Group CEO Olaf Koch said at the demerger presentation in Düsseldorf that "there is no doubt that we will keep real,-"?

Even Metro Cash & Carry with ten quarters of like-for-like growth behind it has seen annual revenues decline since 2003 in Germany and has withdrawn from a number of countries over the last four years.

Metro C&C Russia (photo: Metro Group)
Watching their steppe: Metro C&C in Russia
Admittedly, Metro C&C has made money hand over fist in Russia, but the new constellation will be relatively more dependent on a politically highly difficult country. This means growing political and currency risk on a market where consumers increasingly strive to make ends meet. The EU trade embargo will run until at least July 31 and might be extended if geopolitical tensions increase. Previous plans to IPO look farther off than ever. So where is the investment story?

Divided we fall

Media-Markt in Munich (photo: Hans-Rudolf Schulz)
A Media-Markt in Munich
Meanwhile Media-Saturn, whose Media-Markt and Saturn fasciae posted net revenues last year of around €21bn, remains market leader in both Germany and Europe. Although Metro stresses that its electronics retailer has recorded six consecutive quarters of like-for-like sales growth, profits have not increased at the same rate as sales.

Worse still, Metro and strident founder Erich Kellerhals, whose family investment vehicle Convergenta still holds a minority stake of 21.6 per cent, have been feuding for years. Can a house divided against itself ever be a winning story?

So why are so many analysts suddenly so gung-ho about the split? Is it because Olaf Koch said at last week's presentation that the new entity will be "far more than Media-Saturn"?

At least some analysts foresee an end to the "conglomerate discount" on the share price. This is ironic coming from the very same institutions that once encouraged companies to diversify their risk profile by forming conglomerates.

Presumably, the financial community is also working on the basis that potential investors will be more interested in a pure play for Media-Saturn without "real,-" as a pig in the poke.

Olaf Koch, CEO Metro Group (photo: Bert Bostelmann)
Metro CEO Olaf Koch: "It's the ideal time to take this step and to head for new shores"
Metro CEO Olaf Koch and CFO Mark Frese are clearly upbeat. They envisage increasing international concentration in both Cash & Carry and electronics retailing and hinted that the new entities would be better able to participate in any such process.

Interestingly, Koch lists Sysco rather than US warehouse club operator Costco in a selected ranking table of international wholesale and foodservice players, which would seem to underline a preference for delivered wholesale over big box C&C. But the most exciting scenario would be if Media-Saturn went for Dixons Carphone after mid-2017.

A marriage made in heaven?

As Bernstein senior analyst Bruno Monteyne points out in a plausible and cogent research note, both companies are essentially complementary in Europe. Any union would create combined annual net revenues of around €34bn, making it roughly the same size as Best Buy, the world's largest electronics retailer by sales. The new empire would span 17 countries in Europe, plus Turkey and Russia. There are only overlaps in Spain, Sweden and Greece.

Currys & PC World 2-in-1 (photo: Dixons Carphone)
Dixons Carphone streamlines its store base: Currys & PC World 2-in-1
Dixons Carphone, who are currently optimising their store base of around 1,700 outlets in eight countries after the merger of Dixons Retail and Carphone Warehouse in 2014, has a broad stable of fasciae. These include Carphone Warehouse, Currys and PC World in the UK and Ireland as well as Elkjøp, Elgiganten, Giganti and Lefdal in Scandinavia.

Although the scope for pan-European buying often proves to be limited, Dixons Carphone would give Media-Saturn immediate leadership in the UK and grow its footprint in Scandinavia. For the business year to the 30th of April 2015, Dixons Carphone CEO Sebastian James was able to announce a 6 per cent increase in net revenues to around €12.6bn. This was essentially powered by growth at home.

Dixons Carphone, with estimated pre-tax profit this year of €570m, has a robust balance sheet with net indebtedness of only about €330m. Market cap is currently around €6.2bn. If one excludes the 12.35 per cent stake held by Directors and Senior Management, the largest institutional shareholders are BlackRock, Standard Life and Lansdowne Partners – whose ilk are more likely to be co-financers than obstructers of any potential deal.

Media-Saturn CEO Pieter Haas (photo: Hans-Rudolf Schulz)
Waiting patiently: Media-Saturn CEO Pieter Haas
So is one on the cards? It is generally believed in the trade that Metro Group has carefully examined the Dixons portfolio on several occasions in the past and as recently as three years ago, but couldn't move easily because of the power struggle with Kellerhals. Any merger with Dixons Carphone would certainly have the added benefit from Metro's point of view of watering down the influence of Kellerhals.

Asked about probabilities, a former top manager at one of the players concerned put it to Lebensmittel Zeitung like this: "They would make a very good fit, and both companies know it." Although spokespersons at both companies declined to comment market rumours, one should watch this spot post mid-2017.

METRO

Sales: €38bn
Ebitda: approx. €1.6bn
35 countries


Source: Metro Group
Despite last week's recent declaration of love for real,-, the demerger, which still requires both board and AGM approval, could facilitate the sale of Metro's hypermarket arm. If this Gordian knot could be cut at last, Metro will have turned virtually full circle back to the middle of the 1980s when former CEO Erwin Conradi embarked upon a spree of empire building.

What had originally been a Cash & Carry wholesaler pure and simple gradually became a huge and complicated multi-channel retailer. This cumulated in Metro going public in 1996. Conradi's vision was to offer local European planning authorities one of the world's broadest arrays of retail choices ranging from department stores, hypermarkets and DIY outlets to electronics stores, PC specialists and wine merchants.

MEDIA-SATURN

Sales: €22bn
Ebitda: approx. €0.7bn
15 countries


Source: Metro Group
But, sadly, this grandiose plan didn't work out, and group synergies were far less than expected. As Conradi's autocratic successors appeared to become increasingly remote from their own stores, Metro looked in danger of drowning in a sea of complexity and self-absorption. Strange feelings arise when one speculates what would have happened had Metro stuck to Cash & Carry instead of investing billions of euros and millions of management hours in a failed diversification strategy.

In retrospect, perhaps we should all have realised much sooner that Olaf Koch (45) would pave the way for radical change when he became CEO in 2012. After all, a man who plays electric guitar represents a major departure from the authoritarian management style of the past.

Castles Made of Sand (photo: masterpixel/Fotolia)
Given his penchant for rock music and an uncanny resemblance to Smashing Pumpkins lead singer Billy Corgan, a famous song by Jimi Hendrix comes to mind when reflecting upon the history of Metro: "Castles made of sand fall into the sea eventually." Lebensmittel Zeitung understands that this music is available at Media-Saturn both in-store and online.


Related articles in German: By Mike Dawson & Mathias Vogel in Lebensmittel Zeitung, no. 14, 08.04.2016, and by Bernd Biehl & Hans-Jürgen Schulz in Lebensmittel Zeitung, no. 13, 01.04.2016


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Comments for this article are closed.

  1. Joseph Bastin
    Created 8 April, 2016 12:39 | Permanent link

    Excellent Analysis

    Excellent analysis!!

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