Collapse doesn't Baugur well for House of Fraser et al

Some big high street names may be getting nervous after Icelandic group Baugur went into administration....

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Last Updated: 06 Nov 2012

Investment group Baugur said today that it has applied for bankruptcy protection in the Icelandic courts, after failing to agree a deal to restructure its huge debt pile. It’s not exactly a massive surprise – Baugur, along with the rest of the Icelandic financial sector, has been steadily collapsing under the weight of its own debt ever since the onset of the financial crisis. But it raises awkward questions for some big UK high street names: House of Fraser, Karen Millen, French Connection, Iceland and Goldsmiths are all part of Baugur’s UK retail empire. The collapse of a key shareholder would leave their future under a bit of a cloud...

Baugur said it had been forced to enter a ‘moratorium process’ (a similar process to Chapter 11 in the US - we imagine the Icelandic bankruptcy courts must be about the busiest people in the world economy at the moment) in order to safeguard its assets, after its backer Landsbanki pulled the plug on restructuring talks. The group has been struggling for months as credit and insurance cover have dried up, forcing it to close down its Reykjavik office and lay off half of its London-based staff recently. Baugur is insisting that day-to-day retail operations won’t be affected by today’s developments, and it is only a minority shareholder in many of these companies - but if it is forced to cut more costs or even sell assets, there are bound to be consequences for the shops in its portfolio.

If nothing else, today’s news will certainly cause a few rival investors to prick up their ears. Baugur’s retail investments includes some well-known high street brands, and despite the consumer spending slowdown there’s unlikely to be any shortage of suitors if they’re put up for sale. Retail zillionaire Sir Philip Green has already shown interest, while a number of cash-rich private equity groups will also be sniffing around.

It’s been another rotten week for the reputation of Icelandic finance: yesterday, former Singer & Friedlander CEO Tony Shearer told the Treasury Select Committee that back in 2005, he’d told the FSA that Kaupthing was not a ‘fit and proper’ outfit to buy his bank. Shearer was apparently worried that the Icelandic group seemed to make hardly any of its money from proper banking (not to mention the fact that the management team was a bit homogenous – i.e. they were all about twelve years old and from the same neighbourhood in Reykjavik).

Iceland’s years of growth were fuelled by massive borrowing (about six times its GDP, to be precise). Now this house of cards has collapsed, and with the economy set to contract by up to 10% this year, it’s been forced to go cap-in-hand to the IMF. Baugur’s woes are just the latest chapter in an increasingly sorry saga. UK observers will be hoping that the recent parallels drawn between London and Reykjavik turn out to be as overblown as we suspect they are...


In today's bulletin:

Collapse doesn't Baugur well for House of Fraser et al
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