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UPDATE 1-Hudson's Bay set to reject Signa's bid for Kaufhof, sources say

(Adds details on the companies)

Feb 7 (Reuters) - Hudson's Bay Co plans to reject Austrian property and retail group Signa Holding GmbH's 3 billion euro bid ($3.7 billion) for Hudson's Bay's Kaufhof unit, Germany's largest retail chain, people familiar with the matter said on Wednesday.

The potential deal would combine Germany's two largest department store operators: Kaufhof and Signa's Karstadt. The rejection comes as Hudson's Bay named veteran CVS Health Corp executive Helena Foulkes this week as its chief executive officer.

Hudson's Bay, which also owns the Saks Fifth Avenue luxury department store chain, said in November it would review Signa's offer for Kaufhof, but also called it incomplete, non-binding and unsolicited, with no evidence of financing.

The sources asked not to be identified because the deliberations are confidential.

"Consistent with its fiduciary responsibility, the (Hudson's Bay) board is reviewing the offer," a Hudson's Bay spokesman said on Wednesday.

A Signa spokesman had no immediate comment.

Signa tried to buy the business in 2015, but Hudson's Bay outbid it by paying 2.5 billion euros including debt for Kaufhof as well as its Belgian subsidiary.

Since then, Kaufhof's finances have deteriorated to the point where vendors are finding it more difficult to find trade credit insurance to make shipments.

Hudson's Bay financed the Kaufhof acquisition by using a joint venture that acquired Kaufhof's real estate and became its landlord. Hudson's Bay kept a 63 percent stake in the joint venture, and sold the rest to major investors, including Simon Property Group Inc.

The financial engineering backfired as Kaufhof struggled to cope with higher rents that the joint venture imposed as well as declining foot traffic in stores.

However, Hudson's Bay boosted its financial position to support Kaufhof, agreeing in October to sell its flagship Lord & Taylor building in New York to WeWork for C$850 million ($680 million). Private equity firm Rhone Capital invested an additional $500 million as part of the deal.

Privately held Signa, founded 17 years ago by property developer Rene Benko, now runs more than 125 retail locations in northern Europe, generating annual revenue of about 3.8 billion euros ($4.67 billion), according to its website. It owns a big real estate portfolio with a gross asset value of more than 10 billion euros.

Signa bought Karstadt from the brink of bankruptcy in 2014 for the nominal consideration of just one euro from its majority owner Nicolas Berggruen, son of an international art dealer.

Signa restructured Karstadt by realigning its offerings closer to the tastes of German consumers, cutting costs and making operations more efficient. ($1 = 0.8135 euros) (Reporting by Greg Roumeliotis in New York; Additional reporting by Tom Käckenhoff in Düsseldorf; Editing by Jeffrey Benkoe)