News of the capital consolidation gave a much-needed boost to Iceland's shares, which have been in virtual free fall since they hit a high of 248p four years ago. Last night they closed at 99.5p, up 12p.
However, analysts were unimpressed by the move. "It is a short-term expedient not a long-term solution," said Frank Davidson at James Capel. "All they are doing is introducing a degree of financial leverage on the business. If I were a shareholder I would either vote against the proposal or sell the shares now."
The operation to buy three out of every eight shares at 105p will reduce Iceland's issued equity by 35 per cent.
Malcolm Walker, Iceland's chairman and chief executive, said the buy- back should be welcomed by all investors. "Sellers can get out at a premium. I think we will end up with a more supportive shareholder register."
It is the second time Iceland has returned cash to shareholders. A year ago it spent pounds 42m to buy back 27 million of its own shares.
Mr Walker admitted that Iceland's directors had considered a management buyout because of frustration at the company's low rating on the stock market.
"We'd have been mad not to, it was looking so cheap," he said. "But nobody likes the idea of a de-listing. If you look at the likes of Branson or Lloyd-Webber who took their companies private they had a big slug of the equity. We only have 6.5 per cent. It was never really going to be a runner."
Mr Walker was speaking after Iceland reported a drop in pre-tax profits from pounds 72.6m to pounds 56.2m in the year to 28 December, breaking a 25-year record of uninterrupted growth.
Sales grew by 3.8 per cent to pounds 1.47bn, though like-for-like volumes fell by an estimated 1.2 per cent. Earnings per share dropped from 17.0p to 13.2p, though the dividend was raised by 2.9 per cent to 5.4p.
Clwyd-based Iceland has seen its share of retail food market eroded as larger supermarket rivals such as Tesco, Sainsbury's and Safeway matched its lower prices, stayed open for longer and introduced marketing initiatives like loyalty cards that allow shoppers to save on purchases.
Iceland has also felt the chill from the trend to out-of-town stores and the move by bigger chains to introduce frozen food ranges of their own.
To arrest the decline Iceland plans to create 1,000 jobs from the launch of a new home delivery service. The service has already been tested in Chester, Portsmouth and the North-east of England, resulting in "very encouraging sales increases". It will be extended nationwide.
Customers will be offered free delivery by refrigerated vehicles for purchases of pounds 25 or more within a 10-mile radius of Iceland stores.