Another instalment in retail’s Icelandic saga

Raids on the UK’s retail sector by Icelandic invader Baugur Group have resulted in numerous conquests including clothing outlets Coast, Karen Millen, Mk One, Oasis and Whistles, toy store Hamleys and Goldsmiths jewellers. But now the onslaught has been ratcheted up.

Two weeks ago the Icelandic company was linked to the acquisition of Rubicon, owner of high street fashion stores Warehouse and Principles, via Shoe Studio Group in which Baugur has a minority stake. Last Friday, Baugur completed the &£326m acquisition of the Big Food Group, owner of Iceland supermarkets and wholesale business Booker, through the Bauger-led Giant Bidco consortium. And it also emerged last week that Baugur is in talks about leading a &£1bn cash bid for Somerfield, also owner of Kwik Save.

Many have questioned why Baugur would be interested in the Somerfield Group – the fifth-largest supermarket in the UK – other than the fact that is has possibly been undervalued.

On the day that news of the 190p-a-share indicative offer broke, Somerfield’s share price rose by more than 13 per cent to a five-year high of 185p. The group recorded a pre-tax profit of &£27.9m for the 28 weeks ending November 6, 2004 – up from &£15.5m for the same period in 2003, with like-for-like sales up 0.9 per cent for Somerfield and 0.1 per cent for Kwik Save. But, worryingly, like-for-like sales across the group fell 1.4 per cent over the Christmas trading period.

According to Verdict Research, Somerfield, including Kwik Save had a 4.1 per cent share of the &£129.1bn grocery market last year, while Iceland took 1.2 per cent.

Richard Ratner, a retail analyst with Seymour Pierce, says Baugur’s potential offer for the Somerfield business is a “fair valuation”. He adds: “They say that by putting together the [BFG and Somerfield] businesses they can achieve considerable economies of scale.” And Paul Smiddy, an analyst with Robert W Baird, believes that Kwik Save would fit well with the Iceland chain as they both cater for the same customer demographic.

But this appears to be an unlikely scenario given the way that BFG is being broken up by Baugur following its acquisition.

Former Iceland founder Malcolm Walker is to run a company, containing the supermarket Iceland in which he and Baugur have a stake along with other investors. Walker has made it clear that the company will focus purely on frozen foods and that he does not favour taking on price-led supermarkets, such as Tesco, in high street locations – which a merger of Iceland with Kwik Save would entail. This is a departure from his previous strategy at Iceland, where he tried and failed to reinvent it as an organic food retailer.

One industry insider says: “Iceland was a bit ahead of the curve and it also didn’t have the right brand and customer base.” The same insider adds that Iceland’s prime asset is its retail estate – 750 stores mostly on high streets.

It is thought that this retail estate is being placed in a new property company. This company is understood to be a joint venture in which Baugur, Scottish retail and property entrepreneur Tom Hunter and his West Coast Capital, and Nick Leslau’s Prestbury Investment Holdings have a stake, along with other investors.

Jon Asgeir Johannesson, chief executive of Baugur, is also thought to have recruited Hunter and others to invest in the bid for Somerfield, giving them access to a further 1,200 stores.

Baugur, which is described on its website as an “international investment company focusing on retailing investments and real estate operations”, has a history of working with existing management and is understood to be keen to do so with Somerfield’s. While the future of Somerfield is said to be assured, the same cannot be said of Kwik Save.

Over the past few years a number of Kwik Save stores have been converted to Somerfield. Advertising has not been on the agenda for Kwik Save and at least one source believes that Baugur will sell off the chain to recoup some of its potential outlay. But Baugur’s roots are in food retail and it reportedly controls 45 per cent of the Icelandic food market, so it may have other plans for the supermarket.

Despite having acquired stakes in many UK companies, often with the support of Icelandic banks and private investors, it is not clear whether Baugur is prepared to invest in the marketing of its newly acquired brands.

Essentially Baugur has two strategies. One is to invest in listed companies that are considered to have potential, either because current management is making improvements or new shareholders are prepared to step in to do so – Somerfield and BFG would fall into this category. The other strategy is to take part in management takeovers of strong brands with opportunities for growth, such as the Shoe Studio Group and Mosaic Fashions, which operates the Coast, Oasis and Whistles brands.

Privately owned Baugur is also quick to buy and sell interests in the hope of making a sizeable profit on the way, and has done so through stakes in Arcadia and House of Fraser, which were originally bought as part of supposed takeover plans.

Baugur is not alone in Iceland in spotting opportunities to make money by acquiring UK businesses. At the beginning of the month, stockbroker Teather & Greenwood was snapped up by Landsbanki, the former nationalised Icelandic Bank. Bakkavor, originally a fish processing company with plans to become an international food company, is buying up shares in Geest, which supplies supermarkets with pizzas and salads. Icelandair has acquired a stake in easyJet and its domestic rival Air Atlanta Icelandic has taken over Excel Airways, the UK charter carrier.

A consortium of Icelandic businessmen even controls Stoke City Football Club.

According to Dealogic, the capital investments group, the number and total value of deals by Icelandic companies in the UK has been on the increase since 2002 when &£26.4m worth of deals were completed. This has risen to &£894.1m in 2004.

Iceland is a country of just over 300,000 inhabitants and the scale and size of these deals is causing some in the City to wonder where all the money is coming from. There are mutterings about a Russian connection.

Iceland’s Chamber of Commerce Thor Sigfusson dismisses talk of new money coming from Russia as “absolute rubbish”. He believes that due to the relatively small size of the country, Icelanders naturally look abroad to expand their empires to a market close at hand – in this instance the UK.

A hardworking Icelandic culture, profitable fish industry, buoyant stock market and fully funded state pension scheme are all factors that may have played a part in supporting overseas investment. For the time being at least, the Icelandic invasion shows no signs of melting away.