THE ICELANDIC INVASION: 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 pounds 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 mafia money. Iceland, they reason, is precisely halfway between Moscow and New York, making it the perfect stop-off point for a Russian oligarch to launder 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 pounds 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 (pounds 3.4bn). Heady ratings have made it easy for Icelandic companies to use paper to buy even cross-border rivals: more than pounds 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 mafia 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 pounds 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."