The German retail and travel giant—owner of KaDeWe, Karstadt Quelle, and Thomas Cook—sought bankruptcy protection after public aid was refused
The German government refused two separate requests for state aid for struggling retail and tourism group Arcandor (AROG.DE) on Monday, and on June 9 the company filed for insolvency.
First, a German government steering committee refused to award €650 million ($901.2 million) in government loan guarantees.
Then the government said no to a separate request for a loan totalling €437 million to stave off insolvency. German news agency dpa cited unnamed government sources as saying Arcandor's creditor banks and shareholders weren't contributing enough to help the company. It's unclear whether the government's decision is final.
The refusal to award the €650 million in loan guarantees had been expected after the European Commission had already said the company failed to meet key criteria that would allow it to tap Germany's €100 billion special fund for struggling businesses hit by the global economic downturn.
The European Union has argued that Arcandor doesn't qualify because it was already in trouble before the current financial and economic crisis began. Firms are only eligible to tap the fund if they encountered problems after July 1 of last year.
Arcandor's application for the €437 million government-backed loan, which the company said it needed to keep going for the next six months, was seen as its last chance to avert insolvency.
Essen-based Arcandor, which owns the Karstadt chain of department stores and a majority stake in travel company Thomas Cook (TCG.L), says it is seeking to avert a filing for bankruptcy protection as the expiry of existing credit lines looms. Arcandor said it needed help by Wednesday to prevent looming insolvency. It needs to renew credit lines worth up to €710 million by Friday.
German Finance Minister Peer Steinbrück told ARD television that "a bankruptcy is not totally excluded," and that Arcandor's own shareholders must step in to solve the group's problems.
Government spokesman Thomas Steg said: "It's not comprehensible to the government why the public sector should take on risks while the shareholders so far haven't thought it necessary to give a clear signal by how much they are willing to assume responsibility for the company," Steg said. "We expect that the former owners, the shareholder groups will meet their responsibility."
Meanwhile, the Web site of German financial monthly manager magazin reported on Monday that Arcandor's management plans to submit a new rescue plan to the government that envisages concessions by its main creditors—publicly owned regional bank Bayerische Landesbank, Commerzbank and Royal Bank of Scotland.
The plan calls for a six-month debt moratorium, changes in the interest rates of outstanding loans and fresh credit for Arcandor backed by a state loan guarantee.
Election Outcome Reinforces Merkel's Tough Stance
More than 50,000 jobs are at stake at Arcandor and employees held demonstrations at Karstadt stores across Germany to pressure the government to help out. But the outcome of Sunday's European election has encouraged Chancellor Angela Merkel to maintain a tough line.
Her conservative Christian Democrats remained the strongest party despite losses and their Bavarian allies in the Christian Social Union also did well, boosting Economy Minister Karl-Theodor zu Guttenberg who has argued forcefully against major state-backed corporate bailouts and who was critical of the government-backed rescue of automaker Opel late last month.
The center-left Social Democrats, who have campaigned on a platform of using taxpayers' money to save jobs at ailing firms, suffered their worst-ever nationwide election result on Sunday in what analysts see as a clear sign that the German public favors Guttenberg's approach.
Merkel, aware of Guttenberg's popularity in Germany, appears to be opting for a twin-track strategy: She's letting Guttenberg espouse his hard-line stance to retain core conservative voters, while she presents herself as the pragmatic leader to keep center-left voters on board ahead of the September 27 general election and also to keep her federal coalition government together with the center-left Social Democrats from collapsing.
But she remained tough on Monday. "Without a sustainable plan it's unthinkable that state aid will be granted," Merkel told reporters, calling on Arcandor's owners and creditors to step up contributions.
There's no denying that Arcandor urgently needs money. But it's also clear that the company's problems have little to do with the financial crisis. The department store chain has been in decline for years, losing market share and generating chronic losses.
But unlike automaker Opel, which is in the process of being rescued with government help, Arcandor has some profitable businesses that it could sell to stay afloat. They include Thomas Cook and two flagship department stores, KaDeWe in Berlin—which is often touted as being Germany's equivalent to Harrods—and Alsterhaus in Hamburg. A company that refuses to sell off pearls like that has no right to ask for government aid, experts say.
Possible solutions for Arcandor include a merger with rival retailer Metro, but Arcandor has already said that such a deal would not bring in enough money to solve its problems.
cro—with wire reports