Analysis: Radical Metro revamp unlikely despite Russia IPO plan

By Emma Thomasson and Matthias Inverardi BERLIN/DUESSELDORF (Reuters) - A break-up of sprawling German retail group Metro AG looks unlikely despite speculation that the planned sale of a stake in its Russian cash-and-carry unit is the start of more radical restructuring. Metro said on Monday its supervisory board had approved the sale of up to a quarter of its Russian cash-and-carry business in a London listing in the first half of this year. The sale of the stake in Metro's most profitable unit should raise at least 1 billion euros ($1.36 billion), help cut the company's hefty debt, as well as free up funds to grow the Russia unit and invest in other markets, like China and Turkey. The plan has stoked speculation that Metro, the world's seventh-biggest retailer, could be preparing more dramatic steps to rationalise its four businesses that run over 2,200 outlets in 32 countries. The group has been working hard to improve performance since a shock cut to its dividend last March. But there is little immediate prospect that Metro will spin off its struggling hypermarkets and consumer electronics chain, or be able to cash in on its recovering department stores, to enable it to focus on its core cash-and-carry business. Metro shares have gained more than 50 percent since last March, when Chief Executive Olaf Koch took over direct responsibility for the cash-and-carry wholesale business which accounts for almost half of group sales. They now trade at 17 times expected 2014 earnings, just above Europe's biggest retailer Carrefour on 16.8 times and a big premium to no. 2, Tesco , on 10.9 times. But they are still well below historical levels, hurting the group's biggest shareholder, family-owned conglomerate Haniel , which has been an investor in Metro since 1966 and cut its stake a year ago to 30 percent from 34 percent. UNLOCKING VALUE? Haniel has been selling investments to cut its own debts but those efforts suffered a setback last week after the failure of a bid from McKesson Corp for drug distributor Celesio , in which Haniel has a 50.01 percent stake. "Haniel could further reduce its stake in Metro to cut debt or force Metro to sell assets to pay a dividend but I don't see what Metro could sell and really unlock value," said one analyst, who declined to be named. Haniel denied a report earlier this month that it was pushing for a breakup of the group to raise funds, including the sale or listing of Kaufhof department stores, Real hypermarkets and Media-Saturn consumer electronics chain. Investor newsletter Platow Brief reported that Haniel had threatened not to extend the contract of CEO Koch, which runs until September 2015, if he did not agree to a breakup. A spokesman called the report "complete nonsense", adding that Haniel was not involved in Metro's operating business. In a possible further indication of support for Koch, Metro's supervisory board last week extended the contract of CFO Mark Frese -- a close ally of the CEO -- until December 2017. Under the 43-year-old Koch, who joined Metro in 2009 as CFO and took over as CEO in 2012, the group has already sold Real supermarkets in eastern Europe and its UK and Moroccan cash-and-carry operations, while closing electronics stores in China. Metro has tried in vain for years to sell off its Kaufhof department stores and Real hypermarkets divisions in Germany to focus on cash-and-carry and consumer electronics, which it feels have better expansion prospects abroad. "There has been a back and forth since 2008 about Kaufhof but nobody has come forward who will pay a good price... Neither hypermarkets or department stores are concepts with much future," said Planet Retail analyst Bianca Casertano. COMPETITION The hypermarket format has been suffering as demographic trends such as ageing populations in Europe have accelerated a shift towards more local shopping, while department stores and consumer electronics chains have been hit by online competition. Metro shelved plans in 2009 to float Media-Saturn in the midst of the economic crisis and a revival of that idea seems unlikely, especially given the tough market and the group's tense relationship with the unit's founder, Erich Kellerhals. Billionaire Kellerhals, who owns a blocking minority of close to 22 percent in Media-Saturn, has regularly disagreed with Metro over its management of the chain, delaying its move into the fast-growing online market. Best Buy Co , the world's largest consumer electronics chain ahead of no. 2 Media-Saturn, has seen its shares tumble after it warned of a bigger-than-expected decline in quarterly operating margins last week. "Media Markt cannot be sold/IPOed unless minority shareholder Kellerhals agrees. We also believe there are no obvious buyers for Real Germany and an IPO ...is unrealistic," JP Morgan analysts wrote in a note, adding that selling Kaufhof could dilute earnings per share by about 20 percent. However, analysts at Barclays said Metro could consider other options for Kaufhof, such as cutting store space or subletting to a third party retailer. After Metro announced earlier this month it was closing its cash and carry business in Egypt, it should also consider withdrawing from other loss-making markets like Sweden and Japan, the Barclays analysts said. ($1 = 0.7373 euros) (Editing by Anna Willard)