Landsbanki, the failed Icelandic bank, is poised to kick off the process of selling its majority stake in Iceland Foods.
If this prompts an auction for the whole chain, it would be one of the final opportunities for Britain’s big supermarkets to pick up a large chunk of stores.
“It's the last big piece of the jigsaw,” says one experienced retail analyst.
Consequently, Britain’s big supermarkets are expected to show interest in acquiring the chain.
They are engaged in a frantic race for space, with the big four alone set to open about 19m sq ft of new stores over the next four years. At the same time, suitable sites remain hard to come by and growth in the grocery market is sluggish.
Iceland Foods has about 750 stores, mainly in high street locations up and down the country – from towns in the north of England to Whitstable in Kent.
In the year to March 2010, it generated sales of £2.26bn and earnings before interest, tax, depreciation and amortisation of £184.2m. Sales are expected to have increased in the year to March 2011, while profits are expected to have edged closer to about £190m.
“I am sure everyone will do their due diligence and look at Iceland,” says David McCarthy, analyst at Evolution Securities. “There are not many opportunities to acquire such a large portfolio of stores in the UK anymore. It will lead to further consolidation.”
Wm Morrison, which is building a convenience store business, is expected to cast an eye over the portfolio, while J Sainsbury has said it will take a look, if the sale of Landsbanki’s majority stake leads to an auction.
Almost a year ago, Asda acquired Netto in a £778m deal, demonstrating that it has an appetite for smaller stores.
Industry figures are poised to show the first performance of the acquired Netto outlets, highlighting that acquiring stores can help grocers gain market share.
Almost three years ago, the Co-operative Group acquired Somerfield for £1.6bn, indicating that it was prepared to take on a portfolio of stores of a similar size to Iceland. It is expected to cast its eye over the chain although it is thought unlikely to bid for the entire business.
Tesco could also take a look, although it could be inhibited by competition issues.
The so-called “hard discounters”, Aldi and Lidl, are expanding, while private equity groups could also be tempted.
But the situation is far from straightforward.
Malcolm Walker, the chain’s founder and chief executive, will be pivotal to the process.
Last year, he made a £1bn bid for the 74 per cent of Iceland Foods that he and the chain’s management do not own. This remains on the table.
He is currently on an expedition to Everest, to raise at least £1m for Alzheimer’s Research UK.
Speaking from the expedition, he said that when he returns, in early June, he plans to talk to the banking advisers that are expected to be appointed by the Resolution Committee of Landsbanki, about a “controlled process”.
He also wants the sale to be for the Landsbanki stake, rather than an auction for the company as a whole, and he is keen for any decisions about the future of the company to be made jointly with the Resolution Committee.
Then there is the difference between the sort of price Mr Walker is prepared to pay – he has put a marker down at £1bn – and the £1.7bn to £2bn that the Resolution Committee of Landsbanki is looking for.
Some retailers believe that Mr Walker could equally be a seller at the higher price levels, although he will not be drawn on this.
Mr Walker also has pre-emption rights, which means that if someone makes an offer, he has the right to match it and acquire the company at this price.
“He controls the whole thing,” says one person with knowledge of the situation.
Throughout the history of Iceland Foods, Mr Walker, who founded the business in 1970 and left in 2001, before returning in 2005, has had a knack of making the chain work.
When it comes to a possible private equity deal, “keeping Malcolm committed would be a very important part,” says one seasoned supermarket watcher.
Meanwhile, the Iceland Foods portfolio may not be to the taste of all buyers.
The majority of the stores are leasehold, and so there is no underlying property backing to the business. Many are in secondary locations, and have no car parking facilities.
Most are small supermarkets, rather than convenience stores, which must be 3,000 sq ft or less to be exempt from Sunday trading restrictions.
Clive Black, analyst at Shore Capital, also points out that Iceland Foods is primarily a frozen food retailer.
“It has a lot of frozen and chilled cabinets in it. That will not suit everyone. Unless the buyer wanted to run it as a freezer centre, there would be a higher cost to refurbish the stores,” he says.
One option being floated by some senior retailers is selling off some stores that supermarkets would find attractive, but retaining a sizeable chunk. This could then be sold off to Mr Walker.
But one retail analyst is sceptical about selling off the “crown jewels” and it is unclear whether Mr Walker would be amenable to such a carve-up.
Either way, more store sales could fall out of a deal. If a big supermarket were to buy Iceland Foods, it would likely be required to sell off a number of stores for competition reasons. And with the grocers likely to have pored over the portfolio beforehand, they would have a pretty good idea of the stores they wanted. Asda was forced to sell 47 stores after it bought Netto.
According to Mr Black, “If Iceland is taken over by any individual retailer, there will be a lot of follow- up deals to comply with the competition requirements.”
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