Asda has appointed investment bank advisers to help it mount a potential £1.6bn bid for Iceland Foods.
Britain's second-biggest grocer has hired Lazard to advise it on the financing of a possible offer for Iceland, the 780-store frozen food specialist.
But Asda, which is owned by Walmart of the US, is set to face tough competition for Iceland, whose sale has been triggered by the collapsed Icelandic bank Landsbanki moving to sell its 67 per cent of the business.
The UK's fourth-largest supermarket chain, Morrisons, is reportedly also close to hiring banking advisers to assemble a bid. Malcolm Walker, Iceland's founder and chief executive, is also keen to regain full control of the chain. Along with management, he has 23 per cent of Iceland's shares.
He recently said he had funding in place for a bid for Iceland and did not need investment from a private equity firm, although he said his intentions would depend on price.
If the Iceland estate is broken up, Sainsbury's and other big supermarkets are expected to throw their hats into the ring.
Asda worked with Lazard on its acquisition of 194 Netto UK stores for £778m in May 2010. The Office of Fair Trading subsequently forced the supermarket chain to offload 47 for competition reasons. Asda and Lazard declined to comment.
Walmart, whose operating income was $25.5bn (£15.5bn) last year, could easily fund a bid for Iceland of up to £1.6bn without putting a major dent in its profits.
The winding-up committee of Landsbanki has appointed Merrill Lynch and UBS to run the sale process for Iceland. The resolution board of Glitnir, another failed Icelandic bank, accounts for the remaining 10 per cent of Iceland's shares.
Asda has a 17.2 per cent share of the UK grocery market, compared to Morrisons' 11.9 per cent, Sainsbury's 16.3 per cent and Tesco's 30.7 per cent. At a time of sluggish growth, Asda increased like-for-like sales by 0.1 per cent in the quarter to 31 March.
Walmart, which bought Asda in 1999, is setting up a London team to examine potential acquisitions in Europe. The London team of the retail giant, which won regulatory approval last week to acquire South African grocery chain Massmart, will examine European takeover opportunities.
Walmart, which operates in 15 countries, first entered mainland Europe in 1997 when it bought German hypermarket chain, Wertkauf. But the move was badly executed and it pulled out by selling the chain in 2006.
But European expansion is now back on the cards as there is less growth for Asda in the UK and Walmart's home market is also stagnating.
Walmart has hired Cushman & Wakefield to search for office space in west London to house around 35 to 55 people. Its European move is thought to be separate from its plans for Asda's £1.6bn bid for Iceland.