Metro's Conscious Uncoupling

Retailer's electronics and white goods outlets most likely to attract buyers

For Metro, conscious uncoupling is just the start. Wednesday's announcement that the German retail conglomerate will split its food and consumer electronics businesses could be just the trigger for more dramatic M&A.

Unlocking Value

Metro jumped as much as 12% after the company said it will split in two

Source: Bloomberg data

The plan to create two separate publicly traded companies, one for its Real hypermarkets and cash-and-carries and the other for its Media Markt and Saturn electronics chains, is likely to pique buyers' interest -- especially in the non-food part of the business.

J Sainsbury's 1.4 billion-pound ($2 billion) bid for Home Retail Group's Argos, and Steinhoff's agreed 662 million-pound offer for Darty show how consumer electronics and white goods retailers are becoming more attractive to store chains trying to fend off the challenge of Amazon. The buyers hope such deals will give them bigger scale, the ability to cut prices and bolster their delivery operations.

Although initially slow to adapt to digital retail, Metro is now embracing the internet, where Media-Saturn has introduced same-day deliveries in 175 German cities for customers buying online.

Steinhoff, a South African retailer that also considered a bid for Argos, would be a natural partner for Media Markt and Saturn, particularly given the synergies with Darty, a French consumer electronics retailer, and that it already has shares traded in Frankfurt. But Britain's Dixons Carphone, itself the product of a surprisingly successful merger, could be another potential suitor.

There is always also the possibility that Erich Kellerhals, who founded Metro's consumer electronics business and still owns 22 percent of the company, could acquire the shares he doesn't already own, notwithstanding his already fractious relationship with the management.

The Real hypermarkets business is a sale candidate, while deals in the cash and carry industry aren't unheard of either: Booker bought Metro's U.K. business four years ago.

Metro's Revenue

The wholesale business accounts for half of sales

Source: Bloomberg data

Analysts at Bernstein estimate that the food business could have an enterprise value of about 11.5 billion Euros. If Metro's debt was attributed to this business, then the value of the equity would be about 5.5 billion euros.

The consumer electronics arm could have an enterprise value of 3 billion euros, after subtracting 1 billion euros for the minority interest.

The equity values attributed to the two businesses are close to Metro's 8.8 billion-euro market value -- after the stock jumped by as much as 12 percent on Wednesday. That clearly demonstrates the conglomerate discount that investors had been applying to the group.

But there could be more value to come if the performances of the divisions improve after they are given more freedom and management focus.

Shares of DIA have climbed 55 percent since the Spanish discounter was spun off from Carrefour in 2011. That compares with a 9 percent decline in the country's benchmark IBEX index over the same period.

Shares Surge

DIA has outperformed the IBEX since the Spanish food retailer split from Carrefour

Source: Bloomberg

But the bigger potential for Metro shareholders will be from any bidders lured to the disparate units once they are freed from the shackles of the broader group.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andrea Felsted in London at

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    Edward Evans at

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