MTTRY Ceconomy AG (PK)

By Eyk Henning and Ellen Emmerentze Jervell 

FRANKFURT-- Metro AG, one of Europe's largest retailers, wants to break itself up to boost shareholder value, but one of its biggest investors doesn't like the deal and warns that it would ultimately destroy value.

Dusseldorf-based Metro earlier in September presented details of how it expects to divide into separate retailers of food and consumer electronics. The plan entails spinning off to shareholders a 90% stake in its food operations, which would become a still-unnamed independent stock-listed company run by Metro's current chief executive, Olaf Koch.

The legacy portion of Metro would focus on Media Markt Saturn, which is Europe's largest consumer electronics retailer, with annual revenue of roughly EUR22 billion ($24.7 billion) and more than 1,000 stores across the continent.

Metro owns 78% of Media Markt Saturn. The other 22% is owned by German billionaire Erich Kellerhals through his holding company, Convergenta Invest GmbH, which is now casting a shadow on the breakup plan.

Mr. Koch said the separation was necessary to boost sales and profits at both units, and shareholders reacted enthusiastically when Metro unveiled the plan in March. But skepticism has since weighed on Metro's share price.

Now Mr. Kellerhals is threatening to upend Mr. Koch's plan because he wants profit at Media Markt Saturn reinvested in the chain, rather than paid to Metro. Such a move, if successful, could jeopardize Metro's ability to pay dividends to its shareholders.

"We estimate Media Markt Saturn needs to strengthen its equity by at least EUR100 million to fund necessary investments, particularly into online retail operations," Convergenta's Executive Director Ralph Becker told The Wall Street Journal. He said Convergenta has the legal means to ensure the electronics retailer retains earnings.

A Metro spokesman said the company saw no reason for a capital injection and that Media Markt Saturn was a "cash rich company with almost no financial liabilities."

He said Mr. Kellerhals had not formally communicated any plan to block dividend payments. Blocking payouts would "violate the company statute" and be an "act against good faith," the Metro spokesman said.

The fight comes at an inopportune time for Metro, which, like all brick-and-mortar retailers is battling online rivals. In the U.S., Best Buy Co. has only recently reversed a sales slump, allaying concerns about its ability to lure shoppers back from Amazon.com Inc. and other online rivals. Supermarket chains in the U.S. and Europe have been merging and closing.

Metro's situation raises concerns among some investors. "The ability to pay dividends is a significant aspect we would like to see clarified before moving forward with the spinoff," said Rainer Sachs at Shareholder Value Management, a vocal investor which is Metro's 11th largest stockholder, with a 0.74% stake.

Messrs Kellerhals and Koch have argued publicly over recent years. Analysts and investors have said the tensions have impeded Media Markt Saturn's successful development and many hoped Metro's breakup would end the spat.

"The minority shareholder issues are not new news obviously, but at this critical stage they could be a major headache for Metro," said Bernstein analyst Bruno Monteyne. "Management always seem very confident that there are no governance problems and all court cases are settled. But the situation is far from perfect."

When Mr. Koch in March announced plans to split Metro, he said Mr. Kellerhals "has no potential to interfere with this transaction" because the separation would occur within Metro, where Mr. Kellerhals isn't a major shareholder.

Now questions are emerging.

According to Media Markt Saturn's bylaws, reviewed by The Wall Street Journal, Mr. Kellerhals' Convergenta must sign off on the annual financial statements before a dividend can be paid out.

Joerg Meissner, an attorney with the law firm Morrison & Foerster, said blocking the completion of annual financial statements may not be easy unless there are questions about the correctness of the financial statements. Denying approval for obstruction purposes can be seen as breach of a shareholder's fiduciary duty.

Convergenta's Mr. Becker said he has valid reasons for such a move because of serious concerns regarding Media Markt Saturn's financials. He said Convergenta would likely veto the completion of its annual financial statements.

The Metro spokesman said the annual financial statement couldn't be rejected without material cause, and that Metro had "no knowledge" of any concerns from Convergenta. Mr. Becker's comment was "surprising and disturbing," the spokesman said.

Mr. Becker floated a possibility of dividing Media Markt Saturn's stores up between Convergenta and Metro. He added such a scenario has been discussed until recently but was shelved by Metro. The Metro spokesman said this description wasn't correct.

"Earlier this year, we have had talks in order to find a consensual solution on the topic," the Metro spokesman said, adding: "These discussions failed because of the unrealistic and unacceptable demands of Mr. Kellerhals."

Write to Eyk Henning at eyk.henning@wsj.com and Ellen Emmerentze Jervell at ellen.jervell@wsj.com

(END) Dow Jones Newswires

September 23, 2016 04:57 ET (08:57 GMT)

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