FRANKFURT, May 17 (Reuters) - Metro is a potential partner for department store retailer Karstadt, sources close to the company told Reuters on Sunday, but a deal could force the break-up of Karstadt's imperilled parent company Arcandor.
Metro, the world's fourth-largest retailer, is set to hold talks with the German government next week over a plan that envisages the creation of a new "German Department Store Inc", the sources said.
The move could reshape Germany's department store retailing sector, which has for years suffered from waning profitability as consumers change shopping habits.
But it would also be a blow to Arcandor's hopes of keeping its three businesses -- mail order, department stores and travel -- together, amid a struggle to set up long-term financing. It plans to apply for state aid next week.
An Arcandor spokesman said the company was open to talks if approached. "So far there haven't been any serious top-level discussion," he said.
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Metro would hold just under 50 percent in the new company, which would consist of Metro's department store unit Kaufhof and Arcandor's Karstadt operations, the sources said.
The owners of the department store buildings would take another major stake of just under 50 percent, with banks and other investors holding the rest, one of the sources said.
Eventually, the plan would be to float the "German Department Store Inc" on the stock market, with Metro remaining anchor investor, one of the sources said.
Arcandor plans to ask the German government for 650 million euros ($880 million) in loan guarantees and a loan from the German state development bank.
It has credit lines of up to 710 million euros coming up for renegotiation by mid-June and had to postpone its second-quarter earnings report due to ongoing refinancing talks.
Spinning off its Karstadt department store business would leave Arcandor with its 53 percent stake in Thomas Cook, Europe's second-largest travel company, and its mail order business Primondo.
The head of the world's biggest mail order group, Germany's Otto, told German magazine WirtschaftsWoche Otto might be interested in parts Primondo. (Reporting by Eva Kuehnen, editing by Will Waterman)