Everything must go: The demise of Baugur

Published on Saturday 7 February 2009 13:13

AS JON Asgeir Johannesson prepared for a round of interviews with Icelandic television, no amount of bravado from the pin-up boy of Iceland's economic revolution could disguise the fact that Baugur, his once-powerful Nordic investment vehicle, had unravelled under a mountain of debt.

The rise and demise of his retail empire almost reads like a mini credit crunch saga in itself. In a few short months he has gone from being the Viking raider that bought swathes of Britain's high streets and flirted with a bid for Saks, the iconic American department store, to a group on the brink of administration.

With the studio lights up and a nation watching, the Icelandic entrepreneur let rip: "I expect… these good assets abroad now will wind up in the hands of British vultures, who will probably get all of this for a very low price or nothing at all. I'm sure that Philip Green is dancing a war dance in his living room, because now he will become a large owner of our companies for virtually nothing."

Bitter and twisted was how one retail analyst described his performance. "We are just seeing the pieces unravel," said Nick Bubb, retail analyst with Pali International. "Why Baugur kept on saying they could avoid the situation is beyond me. This is the guy who was denying he had any debt three months ago, and it turned out they had 2bn of it. I'm not so sure we can believe a word they say."

Only hours before, Johannesson's head of retail Jeff Blue had thrown in the towel. The former Merrill Lynch banker has spent the past three months trying to persuade Landsbanki, Baugur's largest creditor, that the investment group was worth supporting. He failed.

In Iceland they call it "moratorium"; over here we know it as "administration". In effect both schemes offer protection from creditors, but by the time Johannesson had wrapped up his studio appearances on Wednesday his once-mighty retail empire that includes Hamleys, House of Fraser, Iceland Foods and Aurum – the luxury group that includes Goldsmiths and Watches of Switzerland – had taken refuge in both. With Landsbanki calling in the group's 1bn debt, BG Holding, the holding company that owns Baugur's UK assets, was put into administration under PricewaterhouseCoopers.

This week, as the company begins a three-week reprieve from all due payments, in which it will attempt to restructure itself with the help of PricewaterhouseCoopers, the City will be asking how a company once regarded as untouchable in the retail sector faces the prospect of a fire sale and who will be willing to acquire its assets.

"The fact is, if you owe the banks a lot of money you have to sell some of your assets," said one analyst. "I suspect eventually these things will be sold, and there should be takers, whether it is Philip Green or private equity.

"You would not think Sir Tom Hunter would have much money lying around to invest in things but these assets are not going to cost what they might have done. There are always crazy people who believe they know better than the market who want to take these things on."

Heading the queue is Sir Philip Green. He already owns a sizeable chunk of Britain's retail pie but is known to want more. His Arcadia group embraces Bhs, Topshop, Topman, Burton, Miss Selfridge, Wallis, Evans and Dorothy Perkins. If he was successful in getting control of Baugur's retailers, a potential 10% share of the UK market would make his retail empire second only to Tesco, which accounts for more than 14%, or 1 in every 7 spent in the UK.

Top of Green's list is Mosaic Fashion, whose brands include Coast, Oasis and Karen Millen. Green is giving nothing away. When asked last week what he thought, he said: "I haven't been offered anything," he said. "We are looking at lots of different opportunities. Should we be offered a business or businesses we will look at them in the normal way and we have finance available to buy things."

Green has been here before. Last October at the height of the Icelandic banking crisis he dashed from his luxury Monaco villa to catch a private jet to Iceland with a view to completing a transformational deal. On the plane was Johannesson. Their plan was simple. Green would make the 2,500-mile shopping trip to buy the billions of Baugur debt owned by collapsing Icelandic banks. By buying up those loans he hoped to seize control of the group for a fraction of its value. But the deal foundered under the complexities of Iceland's financial system.

Green is understood to be still trying to acquire Baugur's debt. Snapping at his heels are Jon Moulton, founder of private equity firm Alchemy Partners, and fellow private equity groups Permira and Texas Pacific.

Sir Tom Hunter is also rumoured to be interested in buying a slice of the retail empire, though close friends say there are "no conversations" with Baugur about buying anything, contrary to speculation that he was about to snap up House of Fraser, which owns the Edinburgh store Jenners. He has pre-emptive rights, along with other shareholders, but sources say there is nothing more to it than that.

By Thursday Landsbanki had played its first card. It wants to avoid a fire sale, and by freezing Baugur's holdings it has scuppered moves by Green or the Saudi Royal Family, who are said to be interested in Hamleys.

But even if Baugur secures a delay, analysts think the assets will eventually fall into the hands of its creditors. The question then is whether creditors would look to sell the assets quickly or hold on in the hope of a better price.

David Stoddard, retail analyst at Altium Securities, said: "There are lots of noises coming out of Iceland insisting that they do not want to get fire sale prices, they want to hang on and get proper value. The ownership structure is so labyrinthian that getting to the bottom of who actually controls Baugur is very difficult."

Amid all the legal wrangling it seems that Johannesson's retail adventure has finally come to an end. His business empire dates back to 1989, when he founded a discount supermarket in Reykjavik's docklands with his father Johannes after making money in his teens by repairing amusement rides and selling popcorn.

In 2001 he snapped up a 20% stake in Arcadia, the Topshop and Dorothy Perkins group, and turned a 70m profit by selling the shares to Green. It became the building blocks for an unprecedented shopping spree on Britain's high streets. Similar investments in J Sainsbury and Marks & Spencer paid off handsomely and within a year Baugur had snapped up fashion stores and jewellers with a series of leveraged buyouts.

With a turnover of 6bn and 50,000 staff, his Nordic investment vehicle acquired stakes in some of Britain's biggest retailers including Woolworths, Debenhams and House of Fraser, but as Stoddard says: "If we have learned one lesson in this sector in recent weeks it is that when you have a debt problem, you have a major problem."

Who will buy Baugur?

Sir Philip Green, owner of the Arcadia group

Top of Green's list is Mosaic Fashions, whose brands include Coast, Oasis and Karen Millen. He is said to be trying to acquire Baugur's debt, which could in effect give him control of the Baugur empire. Also believed to have visited Hamley's management twice in the past 10 days to discuss an investment.

Jon Moulton, managing partner of Alchemy

Has confirmed his company was looking at Baugur assets. Believed to be interested in Mosaic and House of Fraser. Private equity firm Permira is also believed to be interested.

Sir Tom Hunter, tycoon

Has been linked with Jenners but said he is not in any active negotiations. Has said that he would watch developments "with interest" like any other shareholder.

Ahmad M Al Salem, chair of Saudi Arabian General Investment Authority

Understood to be interested in Hamley's, the iconic toy store.

What is at stake?

Mosaic Fashions: It has 2,105 stores and 13,000 employees. Turnover: 838m. Brands include: Oasis; Warehouse; Principles; Karen Millen; Coast; Shoe Studio; Odille; and Anoushka G.

House of Fraser: Founded in 1849, when partners Hugh Fraser and James Arthur opened a drapery shop in Glasgow. Now has 62 stores and 6,500 employees including Scotland's iconic Jenners department store. Turnover: 1.03bn.

Jane Norman: It has 192 stores and 1,600 employees. Turnover: 149.5m.

Iceland: The budget chain has 667 stores and 20,000 staff. Turnover: 1.69bn.

Aurum Jewellery: Includes Mappin & Webb, Watches of Switzerland, Goldsmiths. It is the largest prestige jeweller group in the UK. It employs 1,800 staff at 185 stores. Turnover:300m.

Hamleys: Employs 394 staff in the UK and Ireland. Flagship store in Regent Street. Turnover: 42m.

Wyevale: 121 garden centres employing 4,100 staff. Turnover: 256m.

French Connection: Turnover: 236m.

Debenhams: Baugur owns 6.7% of the chain. Turnover: 2.3bn.