AppId is over the quota
AppId is over the quota
By Mark Potter and Victoria Howley
LONDON | Fri Sep 16, 2011 11:43am BST
LONDON (Reuters) - Shaky financial markets and the complexity of a deal could hamper the auction for a controlling stake in British grocer Iceland Foods and limit proceeds for the creditors of failed Icelandic banks, including Britain and the Netherlands.
Names in the frame to buy the whole of Iceland Foods seem few in number, though founder and CEO Malcolm Walker, who with other managers already owns 23 percent, is in the strongest position to take full control of the frozen foods specialist.
Supermarket group Wm Morrison (MRW.L) is the most likely trade buyer, analysts and people familiar with the situation said, but beyond those two names most possible bidders were limiting their interest to parcels of stores.
"It looks like we could be heading for a pretty restricted field," said one person close to the process.
Private equity was also expected to take a look because of the counter-cyclical nature of Iceland Foods, whose low prices have struck a chord with cash-strapped shoppers, though tough financing conditions may deter some, another person said.
That could dash hopes of a big payout to the creditors of collapsed Icelandic banks Landsbanki and Glitnir, which gained control of their 67 percent and 10 percent stakes in Iceland Foods respectively after the demise of investment group Baugur.
Analyst Chris Hogbin at brokerage Bernstein, who sees Walker as likely to be involved in a winning bid, expects a deal to value the whole company at between 1.3 billion pounds and 1.5 billion, versus early hopes of up to 2 billion.
Walker, who founded Iceland Foods in 1970 and had an offer valuing the business at 1 billion pounds turned down last year, has said he is confident of raising the necessary funds and has no plans to sell his stake or any of the 800 or so stores.
If he does need help, one option could be for him to team up with Morrisons, which could buy a chunk of stores from him.
The 65-year-old, who earlier this year climbed Mount Everest to raise money for charity, could also team up with a private equity firm, which need people close to the businesses they buy in order to run them after an acquisition.
Bank of America-Merrill Lynch and UBS, who are conducting the auction, are expected to send out information to prospective bidders later this month.
GROCERS WANT TO CHERRY-PICK
When Landsbanki announced it would put its stake in Iceland Foods up for sale earlier this year, it was widely assumed most of Britain's top grocers would get involved in the auction.
Most have ambitious store opening programmes and here was a rare opportunity to bag a large number of shops in one go.
However, many of Iceland Foods' stores are an awkward size. Averaging 4,900 square feet, according to grocery specialists IGD, many are too big to be a convenience store that would qualify for longer opening hours, but small for a supermarket. Many are in secondary locations and most have no car parking.
Britain's top three grocers have other reasons for holding back. Industry leader Tesco (TSCO.L) would face problems with competition regulators, while Wal-Mart's (WMT.N) Asda is busy integrating its purchase of Netto UK and J Sainsbury (SBRY.L) does not have the balance sheet strength, analysts said.
Smaller rivals, like The Co-operative Group and Waitrose, have also said they are only interested in parcels of stores.
There is a chance several grocers could club together to try to carve up the business, but that would be complicated. Apart from probably having to persuade Walker to sell out, they would all likely want the same stores -- those in prime locations and with car parking, analysts said.
People familiar with the matter said Tesco and Sainsbury at least were unlikely to take part in a consortium, with any interest in individual shops to be expressed if a new owner decided, or was required by regulators, to sell some sites.
PRIVATE EQUITY AND MORRISONS
Private equity firms, such as Apax, BC Partners, TPG, Blackstone (BX.N), Permira and Advent, could be interested in teaming up with Walker given his strong record at Iceland Foods, analysts said, though some described him as a forthright individual who was not always easy to work with.
Under a shareholder agreement, Walker will win the auction provided he can match the highest bid -- which may be lower than expected given private equity would be grappling with shrinking liquidity in the debt markets.
"We don't have a fully functioning syndications market. It feels like 2008, when bidders had to get their financing in place before making an offer," said a banker who advises private equity firms.
However, one of the people close to the matter said it was too early to rule private equity out of the running, and there were any number of permutations, which could include several houses working together or teaming up with grocers.
"The process hasn't started. It's too early to call success or failure," that person said.
Financing is likely to be less of a problem for Morrisons, which has a strong balance sheet and, unlike private equity firms, would be able to make savings from combining Iceland Foods with its existing business.
Buying Iceland Foods would boost Morrisons' position in fast-growing smaller stores and help its goal to gain share in the south of England. But it could be risky as Morrisons has only just started testing convenience stores and had big problems integrating its purchase of Safeway in 2004.
"I am not sure the stock market would like it," said analyst Philip Dorgan at brokerage Panmure Gordon. "In theory it would add up, but in practise, as we know with Safeway/Morrisons, it doesn't always work out like that."
(Editing by Dan Lalor and David Holmes)
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