Baugur: The Iceman Cometh

A successful acquisition of Woolworths would be the biggest deal yet in Britain for Icelandic retail investment group Baugur

By James Thompson

Some City analysts wrote off Woolworths as a lost cause a long time ago. But Malcolm Walker, chief executive of the frozen food specialist Iceland, and Baugur, the Icelandic retail investment group, clearly have not, and this weekend it emerged that they had made an offer to purchase Woolworths' retail division. Woolworths rejected the offer yesterday.

While the outspoken and straight-talking Mr Walker, who was fired from Woolies 37 years ago for moonlighting when setting up Iceland, is a well-known figure in retail, a certain air of mystery still surrounds Baugur.

Founded by Jón Ásgeir Jóhannesson and his father in 1989, the company has been built up through a string of acquisitions and mergers—of which Woolworths could be just the latest.

Mr Jóhannesson remains chairman of the company to this day, despite being convicted in 2005 of charges related to dealings between himself and Baugur. While he has appointed a chief executive, the founder remains the company's driving force and he will have been closely involved in the view that there may still be some value in the ailing Woolworths.

By the turn of 2008, Baugur had gone on a shopping spree that boasted strategic investments or controlling stakes in large swaths of the UK high street. Its tentacles have enveloped retailers including Iceland, the department store House of Fraser, Aurum Holdings' Goldsmiths and Mappin & Webb jewellery chains, the womenswear chain Jane Norman and Mosaic Fashions, the fashion conglomerate of Karen Millen, Oasis, Principles, Coast and Warehouse.

The bulk of its UK investments are in private companies, but Baugur has taken a series of strategic stakes in publicly listed companies which it believes have strong brands and growth potential. However, eyebrows have been raised at some of its investments in struggling listed companies, such as Woolworths and French Connection. The Shore Capital analyst, John Stevenson, says: "These stakes will be underwater." Baugur also has a stake in Debenhams.

However, it is in the private sector that Baugur's operating model has come to the fore. Typically, Baugur does not acquire outright a retailer itself, but is the dominant shareholder in a consortium that purchases a chain.

Baugur's own philosophy on its retail investments is to let the management teams get on with the day-to-day job of running the business. Bosses at the Baugur-owned businesses tend to speak to Gunnar Sigurdsson, Baugur's chief executive, every week, and there are board meetings with Baugur and the various brands' chief executives each quarter.

However, one criticism of Baugur is that its UK retail portfolio has become unwieldy and there is "not a cohesive strategy", said an industry source. But Baugur stresses that the overwhelming majority of its investments are in food, department stores and fashion chains. To name just a few synergies, Baugur highlights the fact that it can sell clothes from chains, such as young trendy chain All Saints or Moss Bros, into House of Fraser, for example, and that its brands can benefit from shared e-commerce technology and services. The Icelandic investment group also cites that Baugur's international presence—given its experience and investment in US retailers—provides it with a huge platform to further export its brands overseas. Fashion chains, such as Karen Millen and Oasis, are already operating in a plethora of different countries, and last week Baugur said it was launching Hamleys into India, after the opening of stores in Amman, capital of Jordan.

However, the performance of some of its investments has left it with egg on its face. Arguably its biggest failure to date was the collapse of the value fashion chain MK One into administration in May. Baugur bought the chain in 2004, but it failed to deliver a compelling offer and never found a formula for competing against the big beast of Primark.

Mr Stevenson says: "Their retail investments have been a mixed bag, [although] there have been successful ones."