Arcandor requires additional funding of up to EUR 900 million

The Arcandor AG Management Board presented to the Supervisory Board a far-reaching consolidation programme. The aim of the programme is to improve cash flow on a sustained basis. In future, Arcandor will thus generate positive cash flows and results in all three core business areas. In recent years, the Group has reported a high negative free cash flow according to Dr Karl-Gerhard Eick, CEO of Arcandor AG. Sustainable measures are therefore required for the Group to recover. For the implementation of restructuring measures, Arcandor requires additional funding of up to EUR 900 million over a period of five years.

Within the scope of the upcoming consolidation, the Group will concentrate on the profitable core areas of Primondo and Karstadt and continue the consistent growth course of Thomas Cook as part of the Group as a whole. Procurement will in future be managed as a cross-divisional unit and be separated from the assortment responsibility of the brand companies.

As a result, further synergies are to be created, as well as stronger customer orientation promoted in the assortment policy. Business units which not longer belong to the core business or require restructuring are to be developed on an individual basis in an Arcandor cross-divisional responsibility under the name of ATRYS. In this process, the operating and disciplinary management remains with the respective retail segment. With joint procurement, the further development of non-core businesses and an significant improvement of the operating business, Arcandor is setting the course for the sustainable profitability of all business areas and is thus creating the prerequisites for the successful further funding of the Group.

Concentration on the profitable core businesses

In future, the core business of Primondo will consist of the e-commerce and Quelle’s catalogue business in Germany and abroad, the home shopping specialist HSE24 and the existing special mail order providers. In the mail order business Primondo will continue to benefit from the potential of the crisis: As Germany’s third-biggest online shop Quelle has for years been growing significantly faster than competitors and will expand on this position. 50% of all new customers are already pure internet customers. In the 2010/11 financial year, Quelle intends to make as many sales via the internet as with the catalogue.

The core business of Karstadt will in future consist of 81 Karstadt branches and 27 Karstadt Sports branches. The department stores will use the potential of its outstanding central city locations to gain customers from the high-profile middle of society even in the crisis. In so doing, Karstadt intends to maintain its position against the competition with its attractive assortment, high customer orientation and an excellent price-performance ratio.

Dr Karl-Gerhard Eick: "According to current figures, the core businesses of Primondo and Karstadt together show a positive cash flow from Day 1. Our mid-term target for Primondo is an EBITDA margin of 7%; for Karstadt of 6%. Thomas Cook has announced a target EBIT margin of 4.8%, which is set to increase. The restructuring of Arcandor creates the conditions for forming a solid financial basis for the Group and establishing a core business in trading and tourism with sustainable, positive cash flow."

Thomas Cook continues profitable growth course

The Tourism division of Thomas Cook is, and remains, Arcandor’s core business. The company is today by far the Group’s strongest value driver. Thomas Cook will continue its consistent growth course in the future with the support of Arcandor AG. In the 2007/2008 financial year, Thomas Cook generated almost 60% of the sales of the Group as a whole.

The Group will continue to support Thomas Cook in its growth strategy with joint marketing and sales cooperations with the trade brands and via the use of purchasing advantages. In view of the current economic situation, Thomas Cook is not concentrating primarily on increasing sales, but rather on its leading position as the provider with the highest margin on the market. Changes in booking behaviour and currency fluctuations should be compensated for with flexible capacity and cost management. Thomas Cook sees international growth opportunities especially in India, Russia and in China.

New Management Board division bundles procurement of the trading segments

In future, Arcandor will rigorously separate the procurement and assortment policy in the trading segments. Procurement will be bundled centrally in a division to be established at Management Board level and will include the capacities of both trading companies. The responsibility for the assortment policy remains in the brand companies, as does the responsibility for results.

Via the new organisation of the processes and the bundling of volumes, the objective is to achieve synergies of up to 5% of the total purchasing volume at Arcandor (excl. Thomas Cook) within two to three years. The annual purchasing volumes is currently over EUR 7 billion. Around EUR 3 billion of this is accounted for by goods which are not intended for customers (e.g. IT services, rents, logistics, marketing, paper and printing costs).

It’s an objective to transfer the future Management Board responsibility to the new Executive Chief Arnold Mattschull (57). Most recently, between 2004 and 2008, the restructuring and purchasing expert took Takko Holding GmbH to success.

Further development of the non-core businesses in a new Management Board division

The units which are not part of the Primondo core business include the over-the-counter retail business of Quelle with 115 technical centres and approximately 1,500 Quelle shops, Foto Quelle, Küchen Quelle, myby, the Profectis technical customer service as well as the logistic center Linz and customer centres. From the Karstadt portfolio, eight branches (Kiel Alter Markt, Hanau, Kaiserslautern, Hamburg Billstedt, Bottrop, Leipzig, Ludwigsburg, Munich Am Dom), the Karstadt Sports branch in Recklinghausen and the Premium stores KaDeWe in Berlin, Alsterhaus in Hamburg and Oberpollinger in Munich will be developed further in the new Management Board division. The premium stores are among the most successful and most well-known department stores in the world. However, in relation to their target customers, the assortment and the size of operation, they are no longer core business of the Karstadt branches. While Karstadt remains more strongly concentrated on the high-profile middle segment of society, a considerably higher income customer as target group with a strong luxury brand orientation remains the focus for the Premium Group. The operating responsibility remains in the respective retail companies, Karstadt and Primondo.

Criteria such as the strategic fit and the results and cash flow contribution to the Group as a whole were decisive for the decision on the core business. The activity of ATRYS is to manage the reduction of the average annual negative cash flows of approximately EUR 300 million (average figure of several years). The objective of ATRYS is to return this negative amount to zero as quickly as possible.

The future Management Board division, ATRYS, makes it possible for those with operating responsibility to develop their core business in a targeted fashion, with a view to profitability and positive cash flow. It’s the goal to transfer the future Management Board responsibility to the new Executive Chief Zvezdana Seeger (44). ATRYS will concentrate on the further development of the businesses focused there. In her last position, Seeger had executive responsibility at T-Systems for system integration. Seeger is excellently qualified for the task at Arcandor, as she successfully managed numerous restructuring programmes at T-Systems and Deutsche Telekom AG.

The best options for all ATRYS businesses will be examined on the basis of their very varied preconditions and implemented within the coming years. These include, among other things, disposals, strategic partnerships, management buy-outs, restructuring or even closures.

Strategic management holding company with clear focus on cash flow

Concentration on the core business will enable Arcandor to develop into a strategic management holding company with long-term investments in tourism and trade. The consolidation programme will sustainably increase the cash flow in the core businesses and improve the operating performance. In future, cash flow will be the key performance indicator in the Group. All incentive schemes, including the variable remuneration of the managers in the trading segments and in the holding company, will be transferred to this parameter.

All other employees of Arcandor AG will benefit from future company success via an employee participation system still to be developed.

There may be job losses as a result of the measures described in the administrative areas and in the restructured units. Appropriate measures will be designed as socially responsible as possible.

Restructuring as basis for long-term financing of the Group

The aim of the consolidation programme presented today is the sustainable improvement of the Group’s cash flow. The Group expects a further financing requirement of up to EUR 900 million over the coming 5 years for the implementation of these measures in addition to the pending refinancing in the summer of 2009.

At present, the refinancing plan for Arcandor is essentially based on further bank loans. However, the Group is also examining options for state support. Initial exploratory talks with representatives of the federal government and the respective regional governments have been conducted. In the opinion of the Arcandor Management Board, the commercial credit insurers, suppliers, lessors and service providers play an important role in stabilising the Group and its 86,000 employees. Initial talks have already been conducted with these.

Dr Karl-Gerhard Eick: "The reorganisation of the Group in the scope described enables us to create the conditions in which to make Arcandor an efficient strategic management holding company with sustainable and profitable tourism and trading operations. The additional restructuring expenses will be offset by annual results improvements of several hundred million euros. We are confident that we will be able to secure the long-term financing of the Group on this basis with the banks, shareholders, employees and all other stakeholders. With this confidence we have begun talks on refinancing the Group with all partners."