Arcandor: Committed to creating value... sure

Added in 2023 to the portfolio

How to sell your own department stores and then go bust paying the rent.

Arcandor began life as KarstadtQuelle, a sturdy German institution: Karstadt the department stores, Quelle the mail-order catalogue that arrived in every household like a phone book of aspiration (founded by Gustav Schickedanz in Fürth in 1927), plus a controlling 52% of Thomas Cook, the travel group. On 1 July 2007 it rebranded itself “Arcandor” – a coined, vaguely Latinate word that should have served as the first warning (and one can only guess what the agency charged for it). Companies that rename themselves into nonsense are usually mid-pivot away from something true.

Enter Thomas Middelhoff, a CEO with bottomless self-regard, fresh from Bertelsmann and a spell in private equity, who moved from the supervisory board chair into the CEO’s office in 2005. His big idea was the financier’s favourite conjuring trick: sale-and-leaseback. In 2006 the group sold its crown-jewel real estate – Karstadt’s premium stores, including KaDeWe in Berlin and Oberpollinger in Munich – into a joint venture (“Highstreet”) steered by Goldman Sachs’s Whitehall fund and friends, in a multi-billion-euro deal. A wall of cash today; a rising rent bill forever – around €280 million a year, on leases running fifteen years.

This is alchemy run in reverse. You take a company that owns its buildings – boring, solid, recession-resistant – and transform it into a company that rents its buildings from the people you just paid. The cash looks marvellous in the year you book it. The lease looks murderous in every year thereafter, especially once retail softens and the rents ratchet upward regardless.

Middelhoff played the part with gusto, commuting by private jet and helicopter – conduct that would later put him in the dock. He left Arcandor at the end of February 2009, pronouncing his work complete; Karl-Gerhard Eick took over on 1 March. It was complete in roughly the sense that a demolition is complete.

By June 2009 the bill arrived in the most poetic form imaginable: Arcandor announced it could no longer pay the rent on the stores it had itself sold. Three days later, on 9 June 2009, it filed for insolvency – at the time one of Germany’s largest. Quelle, the great catalogue, survived on a €71 million bridging loan only until October, when the administrators gave up looking for a buyer and liquidated it; tens of thousands of jobs went; the creditor banks sold the Thomas Cook stake in September 2009.

The afterlife is its own dark comedy. Karstadt survived insolvency and was passed from hand to hand – first to the investor Nicolas Berggruen in 2010 – before landing in the arms of René Benko’s SIGNA, which merged it with Kaufhof and then, in 2023, also collapsed (see the neighbouring exhibit). Some assets, like LTU in our aviation wing, simply carry a curse: everyone who touches them eventually files paperwork.

Middelhoff’s personal epilogue was severe. On 14 November 2014 the Essen Regional Court convicted him of breach of trust (Untreue) in 27 cases and tax evasion in three, mostly over charter flights and other private expenses billed to the company, and sentenced him to three years. He was arrested in the courtroom over flight risk and spent more than five months on remand before posting €895,000 bail. The Federal Court of Justice confirmed the verdict in 2016; he served the rest largely in open prison and was released early in November 2017. In between he had filed for personal insolvency. The man who pledged to “create value” created, in the end, mostly case law.

Behind the scenes stood the property developer Josef Esch, whose funds, run with the private bank Sal. Oppenheim, were among the landlords of Karstadt stores – and who also managed Middelhoff’s private wealth. There is a beautiful documentary by local TV on him: https://www.youtube.com/watch?v=rvEvkG_1JyQ

And there are a couple of books by Thomas Middelhoff himself, written after the fall: “A 115 – Der Sturz” (2017), composed in prison, and “Schuldig. Vom Scheitern und Wiederaufstehen” (2019).

Museum note: Arcandor sold the roof over its own head and was then surprised by the weather.

Further reading

• Wikipedia – Arcandor (ongoing)
• Wikipedia (DE) – Thomas Middelhoff (ongoing)
• LTO – Middelhoff released from custody after five months (2015)
• GlobeSt – Goldman’s German retail deal (2006)
• YouTube – TV documentary on Josef Esch
• Thomas Middelhoff – “Schuldig. Vom Scheitern und Wiederaufstehen”, Adeo (2019)