Somerfield rejects Baugur bid

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Related tags: Sainsbury's, Morrisons, Sainsbury

British high street retailer Somerfield has rejected the initial
advances of Icelandic group Baugur, but the possibility of a formal
offer - and an eventual link up with the Iceland chain - remains on
the cards, provided Baugur comes up with a good enough offer. But
is a merger with another underperformer such as Iceland the best
solution to Somerfield's own troubles, asks Chris Jones.

Baugur, which is in the process of finalising its takeover of the Big Food Group, owner of Iceland and wholesaler Booker, first approached Somerfield on 9 February, talking of a possible cash offer of 190 pence per share for the chain, valuing it at just over £1 billion.

But Somerfield last week rejected the possible bid, saying that the various pre-conditions imposed by the Icelandic group were unacceptable and that there was "no certainty that the proposal would deliver a formal offer to shareholders at an appropriate level"​.

The town centre retailer has been slowly turning its business around in the last few years after struggling to integrate its 1998 acquisition, Kwik Save, and while its most recent figures showed 1 per cent drop in sales (to around £2.4 billion), the company seems to be on track to at least hold its own in a market where pressure on prices is becoming increasingly severe.

And while Somerfield's performance is unlikely to have any of the big four UK retailers quaking in their boots, its turnaround has prompted renewed interest from the UK market leaders, not least because the location of many of its stores makes it an attractive takeover target for the likes of Tesco and Sainsbury, who are increasingly moving into town centre convenience retailing.

Indeed, Sainsbury has already made an offer for Somerfield - back in June 2003 - which was rejected both by the Somerfield board and the competition authorities, a move which flagged up the growing level of interest in a newly resurgent Somerfield (and the problems likely to face any bid from a major supermarket group).

The difference between the Sainsbury bid and that from Baugur was the reaction of the Somerfield board, which this time did not shut the door entirely on the deal, saying simply that it was not of interest at this time and that the company would continue to pursue its own strategy of revamping its stores and seeking appropriate acquisitions.

Observers suggest that an offer in the region of 200 pence per share would be more likely to tempt Somerfield's board (the Sainsbury bid, back in 2003, was around 103 pence per share or £500 million for the company as a whole), and Baugur has reiterated its interest in the business, suggesting that a formal bid could be a distinct possibility.

While Somerfield's management can be justifiably proud of the hard work they have put in to turn the business around (although they also have to take the blame for the rather pointless acquisition of Kwik Save in the first place), they are unlikely to let that pride stand in the way of a reasonable offer for the chain.

That Baugur's bid more than doubled the value of the company compared to Sainsbury's eighteen months earlier is a testament to just how far the company has come in that time, but management will also be aware that it will only be able to go so far on its own. With the competition authorities almost certain to block any bid from Tesco, Asda, Sainsbury or Morrisons, Somerfield will either have to plough its own course - which it has done successfully if unspectacularly until now - or seek partnerships with smaller players to achieve the necessary scale to compete with its larger rivals.

Of course, a link up with Iceland, which Baugur bought for £326 million, would not necessarily be beneficial at this time, with the one-time frozen food specialist in just as parlous a state as Somerfield. Both chains have prime high street locations for their stores, but their trading positions are radically different, and both have spent large amounts of cash on revamping stores in recent years, making them unlikely to want to go through the whole process again.

It is not simply location that makes a good retailer, though, and both companies could perhaps benefit from Baugur's wider retailing experience (it owns a number of fashion and jewellery chains, for example) to give them a proposition which differentiates them enough from its rivals - not an easy task, as Sainsbury's management knows all too well.

Related topics: Market Trends

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