Iceland cools Somerfield's flotation hopes

Somerfield's hopes of a successful stock market flotation next month received a serious setback yesterday when rival food retailer Iceland issued a profits warning.

The news could not have come at a worse time for Somerfield, Britain's fifth-largest food retailer, as it tries to drum up support among institutional investors for its offer, which closes next week.

It hopes to raise between pounds 540m and pounds 570m at an indicative price of 180p- 190p, at the top end of City expectations. But analysts increasingly believe that Somerfield, headed by David Simons, may have to lower the asking price or even pull the issue altogether.

"The Iceland profits warning has big implications for Somerfield," said Philip Dorgan, retail analyst at Societe Generale Strauss Turnbull. "Pulling the flotation was always a possibility, but that prospect is bigger now. You have had talk about Tesco launching a rights issue to fund a possible purchase of Docks de France, then dodgy stock market conditions but the Iceland news is by far the most significant."

Shares in Iceland tumbled 24p to a five-year low of 118p after the frozen food specialist said first-half profits would be 10 per cent lower than a year earlier because of sluggish sales and weaker margins.

"The bigger guys are getting bigger and tougher and the small guys are getting squeezed," said Bill Myers of broker Williams de Broe. "It's not an industry where it is good to be small."

The news prompted analysts to cut their pre-tax profit forecasts for the year to about pounds 62m from pounds 73m. But Iceland, which last year promised to give back surplus cash to shareholders, is still expected to raise its dividend by almost a fifth to 6.25p, yielding 6.6 per cent. At its offer price, Somerfield stands on a lower historic yield of between 6.3 per cent and 5.9 per cent.

"Somerfield has been priced against Iceland and Kwik Save," Mr Dorgan continued. "I'd be a big seller at 180p."

To match Iceland's yield, analysts noted that shares in Somerfield would have to be floated at about 170p, valuing the company at pounds 510m.

Falling share prices in London and New York have dented confidence in the new issues market. Shares in nuclear generator British Energy went to an embarrassing discount this week while Monsoon, the fashion retailer, abandoned its flotation plans last week.

And some analysts, worried about Somerfield's position in the cut-throat food retail market, reckon the company is worth as little as pounds 450m. However, Somerfield denied the Iceland profits warning would have an impact on potential investors.

Doubts over the float will raise concerns among Somerfield's creditors. Some pounds 192m of flotation proceeds will be paid to the Somerfield holding company to reduce its debt. The remainder will be passed on to the previous holding company, Isosceles, which is expected to pay its senior creditors in full.