Analysis: Reykjavik power struggles put Baugur bids on ice

The timing could not have been worse for Baugur. Last night, two prominent retail deals hung in the balance for the Icelandic investor: its £1.1bn joint bid for Somerfield, the supermarket group, and its £110m attempt to acquire Jane Norman, the women's fashion chain.

The group attempted to put a brave face on the situation, insisting it was "business as usual", but Mr Johannesson, who at 37 seems almost impossibly young to have achieved such notoriety, must surely have been haunted by the memories of his failed attempt to acquire Arcadia in 2002. Back then, just as Baugur was in the closing throes of landing one of the choicest catches on the UK high street in partnership with none other than Philip Green, the news broke that police had raided its Reykjavik offices. Mr Green got cold feet about his partner and the deal was off.

The irony of the timing did not escape City observers. One banker close to the situation said: "I'm sure it's no accident that the original accusation surfaced on the virtual eve of what was then to have been their biggest deal, causing maximum embarrassment. Well, Somerfield would be bigger yet." Cynical Icelanders - and Baugur's advisers - put the coincidence down to certain anti-Baugur currents running through Icelandic politics. In particular, the air around the country's former prime minister, David Oddsson, is charged with antipathy towards a company that, from a standing start, has come to dominate Icelandic life in 16 short years. It is no secret in Reykjavik that there is no love lost between the Johannessons and Mr Oddsson.

Haflidi Helgason, the business editor of Frettabladid, a leading Icelandic daily newspaper, said: "The former prime minister has been very open about his dislike of Jon Asgeir and Baugur. The reasons lie in the changing Icelandic economy. Politicians' power in business is disappearing and we have a strengthening relationship between business and political life.

"At the same time that our financial markets have become more open and our banks have been privatised, businessmen are emerging with a political background or links to the ruling families who have traditionally held power. The struggle between those two forces has come into play during the past two years because the old establishment isn't keen about Baugur's success."

Baugur's rapid expansion, which at one point saw it control two of Iceland's three daily newspapers (including Frettabladid) as well as the main commercial television and radio stations, made Mr Oddsson uneasy. The Icelandic government attempted to push through a media bill that would have forced Baugur to divest some of its media assets. The bill was vetoed by the President, Olafur Ragnar Grimsson, last year, who weighed in to use the veto rights vested in his office by the constitution for the first time in history. (These days, Baugur owns its media interests indirectly though Og Vodafone, a Vodafone franchisee listed on the country's stock exchange).

Relations between Messrs Oddsson and Johannesson hit a low during Iceland's election campaign in 2003 when the then prime minister accused the Baugur boss of attempting to bribe him. Mr Johannesson has since dismissed the charge as "ridiculous". In contrast, Baugur's political links hit the headlines in Iceland last month when a local weekly revealed that the President's second wife, Dorrit Moussaieff, hitched a free lift on a Baugur jet to watch a fashion show in Reykjavik held by its fashion house, Mosaic.

There was no further word yesterday on the nature of the 40-odd charges facing Jon Asgeir; his father Johannes Johannesson; his sister, Kristin Johannsdottir, who runs its investment company Gaumur; Tryggvi Jonsson, Baugur's former chief executive; and two auditors, both of KPMG Iceland.

Because it's summer, and the Icelandic court is in recess, the exact charges will remain a secret known only to those six and their lawyers for at least the next six weeks. Even the Icelandic police were unable to shed further light since Jon Snollasson, the head prosecutor, is on holiday for "at least" the next week, according to his office.

Speculation in the local media, who have seized upon the biggest-ever investigation of an alleged economic crime in the country's history, claimed one thread to the police investigation centred on the use of company funds while Baugur was a listed entity. (The group was taken private two years ago. The Johannessons control 70 per cent, Kaupthing, Iceland's largest bank, has an 11 per cent stake, Kevin Stanford, the co-founder of Karen Millen, owns 8.3 per cent and the rest is held by a couple of other private Icelandic investors.)

Other charges are thought to include fraud against Baugur and breach of accounting regulations and corporate law. Icelandic reports suggest they relate to its acquisition of an Iceland-based retailer, 10-11, in 1999. The charges follow a three-year investigation sparked when one of Baugur's former business partners, Jon Gerald Sullenberger, filed charges alleging he helped Mr Johannesson issue falsified invoices to get money out of Baugur. None of the allegations stood up in court.

A spokesman for Baugur protested the innocence of all parties yesterday. It is countering the charges by filing a suit against the Icelandic government for damages incurred during the investigation. Given that Mr Johannesson has publicly stated he feels the lost Arcadia deal cost Baugur £150m, the claim will not be insubstantial. Baugur's chief executive has also written to the head of the state police, Haraldur Johannessen, demanding the country appoint a new prosecutor, because, thanks to a quirk of Iceland's legal system, the same man heads the body that did the investigating and pressed the charges. The Icelandic public were divided yesterday over the likely outcome. Mr Helgason said: "It's not affecting anyone's opinion of Baugur's businesses here because the investigation has gone on for three years and people have already taken sides." He highlighted one key curiosity of the case: the absence of any apparent victim. "It's not like Jon Asgeir has been systematically trying to get money out of the family group. None of the other shareholders are complaining. People are asking 'Who's the victim?."

Hreinn Loftsson, Baugur's chairman, showed no hint of victimisation yesterday, declaring: "The company stands by these individuals and proclaims their innocence in any wrongdoing." Whether those strong words will be enough to stop Baugur's fellow members of the consortium bidding for Somerfield - Apax Partners, Barclays Capital and Robert Tchenguiz - from following Mr Green's lead and going it alone was a call too close to make last night. Shares in Somerfield closed 4p lower at 191.5p, reflecting City concern that the much-vaunted two-way bid battle could yet peter out.