Why Woolies hasn't gone to Iceland

Retailer Iceland wants to put Woolworths out of its misery - but has met with a frosty reception...

Last Updated: 06 Nov 2012

Woolworths, the former high street giant that has struggled to keep up in recent years, said yesterday that it had rejected an offer from Iceland boss Malcolm Walker, who wants to break up the company and take control of its 815 stores. Woolies said the offer was ‘unacceptable’: it reckons that the restructuring was unworkable in practical terms, undervalued its assets, and would have left the remainder of the company saddled with all the liabilities. So that’ll be a ‘No’ then…

The Iceland bid is being backed by Icelandic group investment Baugur, which owns Iceland (the store, not the country) and also has a 10% shareholding in Woolies. It’s been advocating a break-up for ages, arguing that it makes sense to split the loss-making stores from the more profitable entertainment wholesale and DVD publishing divisions (EUK and 2entertain). Walker, who’s only interested in the retail arm, apparently wants to extend Woolies’ recent push into food (it recently began a joint venture with Somerfield), presumably by stocking it with Iceland goodies.

Woolies isn’t exactly negotiating from a position of strength. The retail arm is losing money hand over fist, its share price has tanked by 70% in the last year, and at last count it had net debt of £124m and pension liabilities of £48m. Some of its long-suffering shareholders may well have been tempted by the prospect of giving up the retail stores as a bad job – given that some analysts reckon the chain is now completely worthless, even an offer worth ‘a few tens of millions’ might seem generous…

Still, it’s not hard to see why the board was so opposed to the idea. Since most of its debt is secured against the property portfolio, spinning off the retail arm would have made it very tough for the group to refinance the debt on the other two divisions, particularly in the current climate. Being saddled with nearly £50m of pension liabilities wouldn’t have helped matters either (this figure is due for revision at some point, but it’s likely to have got worse rather than better). 

To add a bit of extra spice, Walker cut his teeth as a management trainee at Woolies before going off to start Iceland, so he clearly fancies a glorious return. And since the stores clearly would be for sale at the right price, we wouldn’t be surprised if this turns out to be an opening gambit, with a higher offer forthcoming before too long.

Steve Johnson, the ex-Focus restructuring expert who’s just been appointed as new Woolies CEO, doesn’t start for another fortnight – he might find himself running a much smaller business than he expected...

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