Illustrating a major clean-up that is going on in the rather traditional German retail sector, Arcandor has filed for bankruptcy. The holding company announced that its subsidiaries Karstadt Warenhaus, Primondo (which is the head of the group’s mail-order operations) and Quelle were also seeking protection under the German bankruptcy code. Arcandor’s move excludes the group’s profitable tourist operations under the Thomas Cook helm, the specialty mail-order businesses of Primondo, and HSE24, the TV shopping branch of Arcandor.

The company emphasizes that all business units would continue to be operating, that the salaries of all 43,000 concerned employees are secured through August, and that the major shareholders, Madeleine Schickedanz and the private bank Sal. Oppenheim, have expressed their clear commitment to Arcandor.

Various factors made the retail giant’s dramatic step inevitable: First, short-term loans worth some €710 million were due on June 12. The company had been scrambling to come up with the funds. Second, the government refused to help out, stating that the shareholders should be the first to put money into the troubled group. Third, these shareholders did not make their precise rescue plans public. Fourth, potential new partners, led by the Metro Group, did not come to an agreement to rescue Arcandor at the last minute, shifting the problem to Arcandor’s suppliers and other creditors.

With its attitude, the German government shared the point of view of the European Commission, which stated last week that Arcandor’s problems are not a result of the current crisis. Instead, Arcandor’s difficulties are by far older than July 1, 2008, which is the fund’s definition of the starting point of the global crisis. A few hours after that determination, it was announced that the government had rejected Arcandor’s application for an “emergency loan” that would have been handled through KfW, a state-run bank in charge of supporting privately owned companies. The retailer counted on a public bail-out, but the political class was acting under the pressure of Sunday’s elections for the European Parliament. Angela Merkel, the chancellor, and her party, CDU, survived this vote not necessarily as a winner, but at least not as a major loser. Merkel, however, was clear on Arcandor even before the elections: no governmental help without the commitment of the shareholders. She called for a solution without governmental intervention.

A possible long-term solution for Arcandor might be the dismemberment of the group. Thomas Cook, the largest of Arcandor’s companies, is the most profitable and could be interesting for potential investors. And the company’s competitors are already circling. The Otto Group leaked the information that it might be interested in some parts of the Quelle operations.

The key player in this drama, however, is the Metro Group, which has frequently suggested a merger of Karstadt with its own department store subsidiary, Galeria Kaufhof, to form Deutsche Warenhaus AG (“German Department Store Inc.”). Major issues of the ongoing negotiations have been the valuation of Karstadt, the leases for the real estate of its stores and the question of how many doors should be closed. According to Metro, the group thinks that 30 Karstadt and 10 Kaufhof department stores might be closed due to underperformance and/or local overlaps between the two chains.

Legal procedures against former and current top Arcandor managers have been started in the aftermath of the bankruptcy filing. A complaint has been filed against Karl-Gerhard Eick, the company’s chief executive, for postponing the insolvency, which is a crime under the German penal law. Observers unanimously say, however, that this is not the case here, partly due to the fact that Eick, a former top executive of Deutsche Telekom, joined Arcandor effective March 2009 and had, therefore, too little time to save the sinking boat.

More delicate is the case of Eick’s predecessor. An attorney in Essen has started investigations against Thomas Middelhoff, who is supposed to be partner in an investment fund that leases a couple of Karstadt department stores – including Munich’s prestigious Oberpollinger – to the troubled chain for oversized prices. The suspicion is that Middelhoff may have been lessor in his position as chief of Karstadt’s parent, and landlord – as partner of the investment fund – at the same time, which raises suspicion of a possible conflict of interests. Even worse, there are rumors and media reports that one of the two top Arcandor shareholders, the Sal. Oppenheim bank, may be one of the masterminds and investors behind that fund.