Metro AG’s Suspension of Department Store Sale Is Credit Negative for Haniel

Metro AG’s Suspension of Department Store Sale Is Credit Negative for Haniel

Last Tuesday, Metro AG (Baa2 negative) said it had suspended negotiations to sell its department store subsidiary, Galeria Kaufhof, because it was unable to get the price it wanted given poor financial market conditions. The suspended sale is credit negative for the German retailer’s largest shareholder, Franz Haniel & Cie. GmbH (Ba1 negative), which could have benefitted from using the sale proceeds to deleverage. The stalled sale does not affect Metro’s rating or outlook,2 but the proceeds from the divestment could have been used for debt reduction and alleviated negative pressure, positively affecting credit metrics. The divestment could be reconsidered in the future.

Because Galeria Kaufhof is much more focused on Germany than Metro is as a whole, its sale would have reduced Metro’s exposure to the sluggish German economy and increased its relative exposure to higher growth emerging markets, where it has focused its investment strategy in recent years. Metro said it now believes Galeria Kaufhof can be better tapped by keeping it and enhancing its value rather than by selling it at a discount. Galeria Kaufhof’s fourth-quarter 2011 sales were down 4.3%, owing to unseasonably warm weather, while sales in 2011 fell 3.4% owing to reduced consumer spending in Germany and the phasing out of low-margin products and store renovations that affected trading.
As with its peers, Metro faces weak comparable sales growth in Western Europe, which will make it more difficult for the group to deleverage quickly. Our currently negative outlook factors in generally weak metrics for the rating category and a weak consumer environment, particularly in the more mature markets in which Metro operates.

In addition, Metro’s decision to shelve its plan to sell Galeria Kaufhof also dims Franz Haniel’s prospects of receiving a sizable dividend this year. Franz Haniel has a 34% stake in Metro, which accounts for more than 50% of its total investment portfolio. Franz Haniel’s market-based leverage is now more than 45% based on spot prices, which is high for its rating, versus around 37% six months ago. Without the option of using a dividend from the Galeria Kaufhof sale to reduce leverage, Franz Haniel’s ability to delever now hinges on either an increase in the share prices of its holdings, particularly Metro, or on its ability to raise funds through portfolio disposals.

Metro’s future share price can’t be forecast, but conditions remain challenging and any share price increase is unlikely to offset the declines of 2011. Since mid-2011, Metro’s share price has fallen by one third to €27-€29, significantly below the approximately €60 per share price that Franz Haniel paid for its most recent purchase in 2007. Consequently, Franz Haniel isn’t likely to materially reduce its holding in Metro anytime soon.
In addition, small sales of Franz Haniel’s stake in order to partially reduce leverage won’t significantly change Franz Haniel’s strong liquidity profile. The company has access to approximately €1.5 billion of bilateral lines of credit that are more than enough to meet any scheduled repayments and interest costs over the next two years. Because there is no immediate pressure to sell, we do not expect Franz Haniel’s credit profile to materially improve in the next 12 months