Revised Baugur bid means break-up for BFG

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Baugur, the Iceland-based retail group, has made a new proposal for
Britain's Big Food Group (BFG), a move that would almost certainly
mean the break up of the group but strengthen its main supermarket
banner, Iceland, writes Chris Jones.

Baugur first took a 15 per cent stake in BFG back in October 2002, pledging to be a "supportive investor"​ for the British company which at the time was in the full throes of a major restructuring, later increasing its holding to 22 per cent.

BFG's performance has undoubtedly improved over the last two years - its balance sheet was considered strong enough for it to mull the takeover of Londis earlier this year, for example - and in September Baugur made an offer of 110 pence per share for BFG, valuing the company at £378 million.

But a poor first half trading performance - sales down 4 per cent and pre-tax losses of £9 million, caused primarily by the expansion of the major multiples into the high street marketplace, where most of its Iceland stores are based - has prompted Baugur to revise its offer to 95 pence per share, or £326 million, a more reasonable valuation of the company given its current difficulties.

The BFG management has recommended that shareholders accept the revised offer price, with a formal bid now expected before Christmas.

Baugur is the biggest retail group in Iceland, and has extensive investments in Britain, including toy retailer Hamleys, the Goldsmiths jewellery chain and clothes retailer Oasis. But with no food retail experience there, will it be able to succeed in improving the fortunes of Iceland where BFG's current management has failed?

Certainly, a change of management at BFG is unlikely to do any harm. Most analysts have been sceptical about BFG's strategy for some time - indeed, since it was created through the merger of retailer Iceland and wholesaler Booker, a clashing of cultures which most (correctly) considered unlikely to produce the promised synergies.

Rather than try to squeeze more cost savings out of two essentially incompatible businesses, Baugur's strategy would almost certainly be to break up the group. "While Baugur has yet to unveil its intentions once it takes control, it would be remarkably surprising if BFG remains in one piece for long,"​ retail analyst Bryan Roberts, of M+M Planet Retail​, told FoodandDrinkEurope.com​.

"The synergies that were promised for a combined Booker and Iceland have largely failed to materialise and there is little sense in keeping them under the same roof. It therefore seems likely that Booker and peripheral operations like foodservice will be spun off or sold, leaving Baugur with the Iceland chain."

But the changes are unlikely to stop there, Roberts suggested. "It is a poorly kept secret that former Iceland chief Malcolm Walker is keen on acquiring a sizeable batch of Iceland stores to convert to his new Cool Trader concept."​ Cool Trader, a specialist frozen food retailer, was launched by Walker after he was ousted as chairman of Iceland in 2001.

But Baugur is unlikely to invest in BFG simply to sell it all off to the highest bidder. "As for the remaining rump of the Iceland estate, it's anyone's guess as to what Baugur might have in store,"​ Roberts said. "It may try and revive the Iceland brand and attempt to turn the chain around in performance terms, although it's worth remembering that Baugur's domestic operations include successful concepts like the Bonus discount format."

But keeping the Iceland name and turning it around will remain a tough proposition. Keeping a frozen food focus not only brings the company into closer competition with Cool Trader (especially if its ranks are swollen by the acquisition of some Iceland stores) but also undervalues the prominent high street locations of many of the stores. But maximising the value of these locations by opting for a convenience store rebrand brings the group into competition with giants such as Tesco and Sainsbury, a battle which a new management team would undoubtedly prefer to avoid.

The discount store option is possible, but Baugur may be wary of going down this route in light of the persistent failure of home-grown discounter Kwik Save. On the positive side, German retail operators Aldi and Lidl have successfully carved a niche for themselves in the UK, albeit rarely from the kind of high street location that Baugur would have to work with.

Whatever the likely new owners decide to do, Big Food Group will, as Roberts put it, "become several small food groups in 2005."

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