German department stores Kaufhof, Karstadt seal merger, sources say

Germany's two major department store chains Kaufhof and Karstadt have agreed to merge, several sources close to the deal told Reuters on Thursday, in the latest changes to the retail sector brought by fierce competition from ecommerce players.

Canada's Hudson's Bay , which bought Kaufhof in 2015, has agreed to a joint venture with Austria's Signa Holding, which owns Karstadt and will own 51 percent in the new business, to be led by Karstadt boss Stephan Fanderl, the sources said.

The two sides had confirmed in July that they were in talks for a deal when sources said Hudson's Bay was likely to receive close to 1 billion euros (897.8 million pounds) for the transaction.

The merger would result in around 5,000 of the 20,000 jobs at Kaufhof being cut, newspaper Sueddeutsche Zeitung reported, adding that the remaining employees would face pay cuts. Karstadt employs around 15,000 staff.

Cuts are expected at the headquarters of the two groups, as well as in logistics and sourcing, sources had told Reuters.

The deal comes as booming online retail has undermined the business of many department stores. Britain's House of Fraser group collapsed last month and was immediately bought from administrators by Sports Direct .

Occupying prime locations in most major German cities, Kaufhof and Karstadt have fallen on hard times in the last decade, fuelling speculation that the rival chains would be forced to merge. Kaufhof runs 96 stores and Karstadt has 80.

Hudson's Bay had hoped to make Kaufhof the centre piece of an expansion into Europe, but the company is battling its own losses and faced a campaign from activist investors to boost its share price by extracting value from its real estate holdings.

The Verdi trade union said it was "scandalous" for workers to find out about job cuts via the media and called on workers' interests to be respected in the deal.

"This is the future of 20,000 workers and their families. A department store that is built on wage dumping will have no future," Verdi board member Stefanie Nutzenberger said in a statement.

Signa was not immediately available for comment. A spokesman for HBC referred to the company's previous statements. HBC had confirmed in July that it was in talks with Signa.

Since buying Karstadt in 2014, Signa owner Rene Benko has brought the business back into the black in the last financial year after making cuts, giving the stores more of a local flavour, teaming up with partners and promoting ecommerce.