Icelandic retailer astonishes City with £568m approach for Arcadia

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Arcadia, the high street retailer which includes Burton, Top Shop and Dorothy Perkins surprised the City yesterday when it announced it had received an approach that could lead to a takeover.

The offer has come from Baugur, an Icelandic retail group, which is already Arcadia's largest shareholder with a 20.7 per cent stake. It is proposing a cash offer of 280p-300p a share, valuing Arcadia at up to £568m.

Arcadia shares soared 22.5 per cent to 268p on the news, which came hours after Arcadia had reported better-than-expected full-year figures, including a return to the black and a renewed dividend payment.

Stuart Rose, who only became Arcadia's chief executive a year ago, appeared to be caught off-guard by the development even though Baugur says initial discussions started two or three weeks ago.

It is understood Arcadia received a letter from Baugur two days ago. Arcadia announced the proposal after consulting the Takeover Panel once the board heard that the news was in danger of leaking.

Analysts were sceptical the offer would succeed at 280-300p. John Baillie, at SG Securities, said it may need to be pitched at 330p-350p to be taken seriously. "If they can get the funding for a bid at that level shareholders would probably take the money and run," he said.

At 300p a share, Mr Rose would net £16m from his share option package, which would be triggered by the deal.

It is not clear how Baugur would fund the takeover though it said it has a number of options available to it. Deutsche Bank is acting as its adviser.

Baugur is quoted on the Iceland Stock Exchange though its £150m stock market value makes it much smaller than Arcadia. It is Iceland's largest food retailer but also has petrol stations and clothing interests. It recorded profits of £3.9m on sales of £174m last year.

It already has a trading link with Arcadia as it is the company's franchisee in Iceland and Scandinavia. It has 440 stores in the United States including the recently acquired Bills Dollar Stores.

Jon Johannesson, Baugur's 33-year-old chief executive, hinted at why his company is interested in Arcadia. "We are seeking to grow internationally and are keen to do more in Europe," he said. It is thought Baugur might take Arcadia's "younger" brands such as Top Shop and Dorothy Perkins to markets like France, Germany and, potentially, the US.

Baugur started buying Arcadia shares in September last year when they were languishing at around 40p.

The shares have soared following the appointment of Mr Rose as chief executive in November last year after he sold off formats such as Principles, Warehouse and Racing Green. The shares have been the best performing retail share in Europe so far this year.

Mr Rose declined to comment further on the Baugur approach yesterday, saying discussions were preliminary.

Arcadia's full-year figures yesterday showed pre-exceptional profits of £53.3m in the year to 25 August compared to a loss of £8.5m the previous year. The figures came before exceptional charges of £102m.

Like-for-like sales in the year were up by 6.6 per cent on the previous year. Current trading is stronger than many rivals with like-for-like sales in the eight weeks to 20 October up by 6.2 per cent.