Baugur bids £1bn for Somerfield

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The Independent Online

Shares in Somerfield shot up 14 per cent yesterday after the supermarket group revealed it had received a £1.03bn takeover approach from Baugur.

The Icelandic conglomerate, which already owns a string of UK retail businesses, laced its prospective 190p-per-share cash offer with pre-conditions, including the stipulation that Somerfield's existing management team stays on.

It is the third takeover approach that the struggling supermarket group, home also to the Kwik Save chain, has received in the past 18 months.

In a statement confirming a report in yesterday's Independent, Somerfield said it was "investigating the approach" but warned there was "no certainty" that an offer would follow. "The board will make a further announcement in due course," it added.

Speculation that Baugur, which started life as a discount food retailer, would pounce on Somerfield has mounted since the Icelandic group sealed its £326m purchase of Big Food Group, the owner of the Iceland chain. Baugur first started building a stake in Somerfield in December 2002 when the shares traded at about 75p; it has since amassed a 5.55 per cent shareholding. But Baugur was tight-lipped yesterday over its intentions for Somerfield and its plans are understood to be at a very early stage.

A well as insisting that Steve Back continues as chief executive, Baugur has demanded access to Somerfield's books. Its pre-conditions include winning the board's blessing and striking an agreement with the trustees of the group's pension schemes over how the £78.7m deficit is to be funded. Jon Asgeir Johannesson, 37, Baugur's ambitious chief executive, must also arrange financing.

Analysts said it would make sense to merge Iceland's 760 stores with Kwik Save's 525 because both chains target a similar cash-conscious shopper. Although Somerfield's 700 stores are angled towards a slightly more affluent "top-up" shopper, greater scale would enhance the group's buying power with suppliers, boosting its margin, they added.

Buying the group would give Baugur a 7.3 per cent share of the UK food retailing market, some way behind fourth-placed Wm Morrison, which controls 12.4 per cent. Analysts were divided over whether 190p per share represented fair value for the group. Paul Smiddy, at Baird Securities, said the offer was "cheekily low". "The key driver is Baugur realises it has overpaid for Big Food Group and is attempting to salvage some value out of that deal," he said.

Rhys Williams, at Seymour Pierce, said the mooted take out price was a "fair valuation", representing a 17 per cent premium on yesterday's opening share price. He added: "We would not rule out a further bidder entering the fray since the Somerfield fascia offers significant potential."

In 2003, John Lovering, the chairman of Peacocks, the discount retailer, led a group of investors that made takeover proposals worth 103p and 120p per share. Shares in Somerfield rose 22.5p to 184.5p yesterday.

Baugur, which also owns the clothing chains Karen Millen and Oasis, and Goldsmiths, the jewellers, built up its empire from a single discount food retailer called Bonus that it opened in 1989. Bonus now forms part of its Scandinavian retailing interests, which span 100 shops.

So where do these Icelanders get their money?

Last week it was Rubicon, the Warehouse and Principles clothing group; yesterday it was Somerfield. Barely a day seems to go by without Baugur swooping on another UK retailer.

However, the food-to-media-to-telecoms conglomerate does not hold the monopoly over the Icelandic invasion of UK plc. A swathe of its compatriots are also busy knocking on a host of British corporate doors.

Teather & Greenwood was the latest company to capitulate, when it agreed last week to a £43m bid from Landsbanki, one of Iceland's top banks. Meanwhile easyJet, Geest, the food manufacturer, and Singer & Friedlander, the investment bank, are just a handful of the other companies to have been targeted by Icelandic groups during the past few months.

Yet the question obsessing the City is not which company will be next, but how this acquisition spree is being funded. Barely 300,000 (about the same as Cardiff) people live in Iceland, making its recent prominence in the UK little short of remarkable.

The favourite theory doing the rounds is that Reykjavik is awash with Russian money. Iceland, they reason, is precisely halfway between Moscow and New York, making it the perfect stop-off point for a Russian oligarch to off-load the odd billion roubles. Plus, wasn't the Russian connection cemented by presidents Reagan and Gorbachev's choice of Reykjavik as their setting to end the Cold War?

Icelanders, naturally, assert that the Russian money notion is nonsense. But everyone knows where it comes from. Three years ago, a trio of Icelanders led by Bjorgolfur Thor Bjorgolfsson sold a Russian brewing business he built from scratch from a disused Pepsi plant to Heineken for more than £200m. Mr Bjorgolfsson, who, like most of his peers is in his late 30s, used his spoils to acquire most of Landsbanki through his company, Samson Global Holdings. He also has a 30 per cent stake in Actavis, the pharmaceuticals company set to float on the London Stock Exchange this year. Hence the theory that Icelandic companies are awash with Russian money.

Instead, Larus Welding, the head of Landsbanki's London offices, says there is a more arcane, threefold explanation for Icelandic liquidity. The first comes from the country's pension system which, unlike Britain's, is fully funded. There is a tight cap on the amount of money pension funds can invest abroad, which means most of the surplus gets pumped into domestic companies.

The second lies in Icex, the catchy name for Iceland's stock market. It rose 60 per cent last year. In 2004, the value of listed companies soared by 400bn Icelandic kronur (£3.4bn). Heady ratings have made it easy for Icelandic companies to use paper to buy even cross-border rivals: more than £1.5bn of new stock was issued last year, although no new companies listed. Kaupthing Bank marked Iceland's 60th anniversary of independence from Denmark by buying the Danish corporate lender, FIH, last year. Similar deals across Scandinavia have given Kaupthing access to stronger balance sheets than its own, creating an instant source of credit.

The trigger for the recent stock market boom was the fact that Iceland joined the European Economic Area (EEA) only in 1991. The deregulation of the economy, most notably its banks, followed swiftly. Kaupthing, Landsbanki and Islandbanki, the top three, were privatised outright only in 2003 and appear to be making up for lost time.

Mr Welding's third explanation is about as fishy as it gets. "We have always had very good control over our fish stocks, which has created a lot of underlying wealth," he says.

Nick Stagg, the chief executive of Teather & Greenwood, which has advised Baugur on recent deals, says the country has "seriously cheap energy". Not only that but the energy is geothermal and hydroelectric, and so renewable. "It's so cheap that people heat their front drives to keep them frost free," he says.

Moreover, there are three big US-owned aluminium smelters, which means a good balance of payments coming in, he says. (He also claims never to have met a single Russian in his many trips to Reykjavik, further dousing the Russian money theory.)

A major quirk of Icelandic corporate life is how closely linked each company is. Glance down any shareholder register and the same names pop up again. Even Baugur, which took itself private in July 2003, is part of this web: it owns a small stake in Kaupthing bank, which in turn has about an 11 per cent shareholding in Baugur.

And the interconnections do not stop at Icelandic companies. Kevin Stanford, the co-founder of the Karen Millen fashion chain, has popped up as a co-investor in most of Baugur's recent deals. He took a stake in Shoe Studio, the Baugur-backed retailer that bought Rubicon, weeks after taking a 9 per cent equity stake in Big Food Group. He also owns 8.3 per cent of Baugur, acquired late last year from Kaupthing.

While the flurry of Icelandic activity in the UK is grabbing the headlines, Icelandic bankers point out that the total value of the deals is modest: less than £900m was spent on British companies in 2004. And although Baugur's Jon Asgeir Johannesson may be focusing attention on the British high street, his peers are looking further afield. Mr Bjorgolfsson is active in Central and Eastern Europe.

That said, few believe the recent spate of M&A will dry up in the UK. "For us, it's a sense of pride," Mr Welding says, adding that on top of such mundane reasons as the lack of time difference, the number of daily flights and the fact that English is Iceland's number two language: "We like to punch above our weight so we'd rather operate in Britain than in the Danish or Scandinavian markets."