Electra Fleming Buys German Woolworth Chain

Electra Fleming in late September agreed the DM950 million (ecu 482 million) MBO of Deutsche Woolworth from Venator of the US. The deal, one of the largest buyouts to date in Germany, was Electra Fleming’s 13th Continental European investment this year.

The sale, via an auction led by Morgan Stanley, severed Venator’s last remaining association with the Woolworth store brand, leaving the group positioned as a speciality retailer.

With 357 general merchandise stores in its home market and a further seven in Austria, Deutsche Woolworth is one of the largest retailers in Germany. Faced with a difficult retailing environment, Deutsche Woolworth began a restructuring programme in 1996 that has delivered significant improvements in purchasing, logistics and labour flexibility. In 1997, the chain generated DM44 million of post-tax profit on sales of DM2.2 billion.

Electra Fleming, which won the deal in the face of competition from Legal & General Ventures of the UK and a number of German bidders, put together a financing package totalling DM1.095 billion, including transaction costs and working capital. Equity accounted for only DM150 million of the total funding, with Electra Fleming underwriting DM146.2 million for a 90% stake. The senior management team, headed by chief executive Manfred Schnmeier, holds the remaining 10%. Electra Fleming may later syndicate a portion of its holding but will retain an overall majority stake in the company.

The buyout, on the face of it, is highly leveraged. In fact, the funding structure contains very little conventional term loan. Thanks to the high value of the 117 freehold properties that Deutsche Woolworth owns outright, the bulk of the DM845 million acquisition debt, arranged by Bayerische Hypo- und Vereinsbank, took the form of long-term mortgage-type funding with a maturity in excess of 10 years. The total funding also includes DM100 million of ancillary facilities.

Damien Lane of Electra Fleming, a member of the London-based team that worked in tandem with the group’s German office on the deal, said that Deutsche Woolworth, which retails a wide range of discount general merchandise including clothing, fashion accessories, toiletries and household goods, is currently “similar to Woolworth in the UK ten years ago”. The UK chain has since refocused its business to concentrate on a narrower range of goods, including audio and video entertainment goods, confectionery, childrens’ clothing and toys. The new owners of Deutsche Woolworth intend to implement a more focused merchandising strategy – which will not necessarily parallel that of the UK chain – while continuing to operate as a value retailer. Deutsche Woolworth also plans a programme of store modernisation, to be carried out in parallel with expansion of the chain through the acquisition of new outlets.

Electra Fleming plans to float Deutsche Woolworth within three to five years.