By Tassilo Hummel and Caroline Copley
BERLIN (Reuters) - Hudson's Bay Company <HBC.TO> and Signa Holding will merge Germany's Galeria Kaufhof and Karstadt to form Europe's third biggest department store chain as they battle online rivals.
The combined department store group will have annual sales of around 5.4 billion euros (4.84 billion pounds), putting it behind Spain's El Corte Ingles and Britain's Marks and Spencer <MKS.L>, market research provider Euromonitor International data shows.
Amazon's advance in Germany, its second biggest market after the United States, has come at the expense of groups such as Kaufhof and Karstadt, while online fashion retailer Zalando <ZALG.DE> has taken a chunk of spending on shoes and clothes.
Department stores emerged in the nineteenth century after the advent of mass manufacturing, but have fallen on hard times as consumers hunt for bargains online. The online retail industry in Germany was worth around 58.5 billion euros in 2017, Germany's E-commerce association said.
And while record-high employment and above-inflation pay hikes have helped household spending become the main driver of German growth, Kaufhof and Karstadt have failed to benefit.
"This partnership is a smart, strategically sound opportunity to equip both companies with the capabilities to strengthen operations and overcome the challenges in the German retail market," HBC Chief Executive Helena Foulkes said.
The combined group will be 49.99 percent owned by Canadian retail giant Hudson's Bay, while Austrian Karstadt owner Signa will hold the remainder. The group will have 243 stores in Germany, Belgium and the Netherlands and employ some 32,000 people, the two companies said in a joint statement on Tuesday.
Signa will manage the day-to-day operations of the business, which will be led by Karstadt Chief Executive Stephan Fanderl who will have to tackle growing online sales.
The German retail association (HDE) expects these to rise by 10 percent this year, compared to a forecast for just 1.2 percent growth for over-the-counter sales.
British department stores have also been hit by changing consumer habits. BHS went bust in 2016, while Debenhams <DEB.L> has warned on profit three times this year and House of Fraser collapsed into administration last month and was immediately bought by Sports Direct <SPD.L>.
REAL ESTATE ASSETS
Kaufhof traces its roots back to 1879 when Leonhard Tietz opened a tiny textile shop in Stralsund, in northern Germany, while Karstadt was founded two years later by Rudolf Karstadt who opened the first store in Wismar on the Baltic coast.
Hudson's Bay bought Kaufhof in 2015, hoping to make it the centre of its European expansion. But the company is faces its own losses and an activist investor campaign to boost its share price by extracting value from its real estate holdings.
Signa owner Rene Benko bought Karstadt in 2014 and returned it to profit in the last financial year by making cuts but also giving its stores more of a local flavour, teaming up with partners and promoting ecommerce.
Occupying prime locations in most major German cities, HBC and its European joint ventures will sell stakes in real estate assets to Signa, resulting in net proceeds of 411 million euros for HBC from the deal.
It will use the proceeds to reinvest in the new joint retail business and pay down debt.
HBC said the merger valued the German real estate assets at 3.25 billion euros, compared to the 2.51 billion euros it paid for Kaufhof in 2015.
(Additional reporting by Emma Thomasson, Matthias Inverardi and James Davey; Editing by Maria Sheahan/Keith Weir/Alexander Smith)