BACKGROUND:Dodgy deals are rumoured to be behind the collapse of German retailing giant Arcandor
WHEN GERMAN investigators announced a breach of trust investigation into Thomas Middelhoff, former head of retail group Arcandor, it marked the final fall from grace of the one-time poster boy of modern German business.
The preliminary investigation centres around alleged irregularities in the sale and lease-back, on Middelhoff’s watch, of department stores operating under the Karstadt brand.
In Germany, there is no shortage of schadenfreude at this latest twist in the career of the remarkable Middelhoff.
His rise to fame coincided with the departure of the old “Deutschland AG” (Germany plc) guard: ascetic white-headed men who favoured discretion, gold-rimmed glasses and conservative suits. Middelhoff was anything but discreet, with his sharp suits, mane of brown hair, rimless glasses and enough confidence to sell a tanker of snake oil.
Like no one before him, the Düsseldorf-born son of a textile manufacturer realised that new business journalism was holding out for management heroes, and he was happy to oblige.
In hindsight, like many of his peers, Middelhoff’s self-made image is considerably more impressive than his record. The father of five made his name during a meteoric rise through the ranks of Bertelsmann, the German media empire that began life as a bible publisher in 1835.
He joined the board of Bertelsmann in 1990 aged just 37 – a mere child in the aged world of German business – and was appointed chief executive eight years later.
He transformed the privately held family business beyond recognition, buying publisher Random House, signing a joint venture with AOL Germany and launching Amazon lookalike BOL.
There was the much-hyped deal with a revamped, legal version of Napster, the music-trading platform and, in the spring of 2001, Bertelsmann took a controlling stake in RTL, Europe’s largest private broadcaster.
Middelhoff had transformed the firm into the world’s number three media company and dreamed of going higher. It was his daring decision to take Bertelsmann public, however, that would prove his undoing, particularly when the dot.com collapse revealed many of his big Bertelsmann deals were expensive flops.
An inherent clash of culture between Middelhoff and the controlling Mohn family had become too great. Barely able to recognise their company any more and unhappy at the scrutiny its new public status brought, the Mohns kicked him out in 2002.
AFTER TWO years in private equity wilderness in London, he bounced back to join the board of KarstadtQuelle, a German retail icon with holdings that included Berlin’s KaDeWe department store, a mail-order business and travel company Thomas Cook.
A year later he was appointed chief executive. He renamed the group Arcandor and began a radical slash-and-burn of the troubled department store business. Unprofitable houses were jettisoned and staff let go.
Despite all the dust he generated, though, Middelhoff failed to present a convincing long-term strategy for the department stores to win back customers lost to shopping centres and youthful chains like HM and Zara.
“Arcandor missed the progress in German retailing for years,” said analyst Sebastian Hein of Bankhaus Lampe in Düsseldorf. Too many Karstadt stores were stuck in an Are you Being Served? time-warp of 1970s decor, cranky staff and a range of stock that ran the gamut from designer to bargain basement.
To give the creaking company accounts a shot in the arm, Middelhoff sold off Karstadt’s 91 stores for €4.5 billion and leased them back. He departed last year with a €2 million bonus, claiming breezily that he had “saved” the company. Subsequently, Karstadt posted losses of €272 million on sales of more than €4 billion.
It was the final straw for analysts, who decided that the golden boy manager had merely rearranged the deckchairs on the Arcandor Titanic. Arcandor’s share value plunged, from €30 two years ago to less than €1 last week, and the company filed for insolvency.
Middelhoff’s successors hope they will be next in line for state aid after Opel. With 25,000 workers, they are a bigger employer than the car company.
The company requested €650 million in guarantees to help refinance loans that fell due last week, as well as a further €437 million in credit from the state-owned development bank KfW.
The government in Berlin has yet to act but is less than impressed so far.
“It’s not really evident to the government why public money should be put at risk,” said government spokesman Thomas Steg.
Berlin officials say the problems of Arcandor are of its own making and that it should consider a merger with the Kaufhof department store chain operated by Metro, the country’s largest retailer.
The final nail in Middelhoff’s corporate coffin came with a letter from the government in Berlin asking that state prosecutors examine the investment fund that bought the Karstadt properties.
According to reports, the rents Karstadt agreed to pay are far above the market average. In addition, Middelhoff and his wife are reportedly involved in the fund that now owns the buildings.
In an e-mailed statement, Mr Middelhoff denied the breach of trust allegations and said he welcomed the investigation as a way to clear the air.
“So often with Middelhoff, the big visions give way to modest results,” said Anne Seith, business correspondent with Spiegel Online. “In public perception, Middelhoff has finally gone from visionary to pig-headed windbag.”
