The future of beleaguered German conglomerate Arcandor hangs in the balance after it began insolvency proceedings last week.

Shares in the stricken business rallied on speculation last weekend that it was considering merging insolvent department store chain Hertie with Arcandor’s Karstadt department stores.

It also emerged that, following the German government’s rejection of Arcandor’s appeal for state funding, which forced the insolvency proceedings, the Economy Ministry confirmed that the group could apply for a different form of state aid - Massekredit, a government-guaranteed loan granted once insolvency proceedings begin.

Arcandor employs more than 50,000 staff in Germany at Karstadt, Primondo home shopping group and its Thomas Cook travel company.

Arcandor chief executive Karl-Gerhard Eick said he would continue talks with rival German retailer Metro about a possible takeover or merger of its Kaufhof chain with Karstadt, and would hold discussions with other parties both domestic and international.

Debenhams, which earlier this month amassed a £250m war chest after a £323m share placing, declined to comment on speculation it was interested in Karstadt.

Investec analyst Katharine Wynne questioned who the potential partners could be in any merger in the wake of media reports that 500 of the 643 department stores owned by the top five German chains have fallen into receivers’ hands.

German employment law would be a barrier to overseas retail interest in the group, she believed. Wynne said: “We hope that Debenhams will continue to take the view that the German department store sector should not be touched with a bargepole.

“Even Metro has reportedly made it a condition of its interest that it would leave behind the debt and employee obligations.”

Otto, the German family-owned mail-order business that operates Freemans, Grattan and Oli in the UK and has expressed an interest in Karstadt’s sporting goods stores, “could be a contender for parts of the Primondo business”, said Wynne. However, Otto has so far ruled out any interest in it.

Wynne added: “We wonder if a recent UK entrant to the German home shopping market might be among these [interested parties], or at least for parts of them.”
Any merger would be reviewed by anti-trust authorities - a process that could take up to four months.