Baugur could extract some synergies from teaming up Iceland and Kwik Save, but it could prove a marriage made in hell, warned analysts as news of Baugur’s interest in Somerfield Group broke this week.
Just two days before the Icelandic investor’s deal to acquire Big Food Group was set to be ratified, Somerfield confirmed Baugur had approached it with a cash offer of 190p a share. The approach “envisages current management continuing to run the business,” said the company.
Pitched well above the 120p that entrepreneur John Lovering was prepared to pay for Somerfield in 2003, the offer values the company at £1bn and would enable Baugur to merge the 1,260-strong Somerfield and Kwik Save estate with 748 Iceland stores.
However, merging two struggling businesses was not without risks, said Robert Baird analyst Paul Smiddy. “They seem to be trying to dig themselves out of a hole having overpaid for Big Food Group,” he said. “They should have left BFG alone to focus on Somerfield.”
As there was a lot of overlap between Iceland, Kwik Save and Somerfield stores, said Teather & Greenwood analyst Dave Stoddart, there would have to be some rationalisation after a deal. But he also warned rivals with a stronger offer could trade aggressively against any group formed from a merger.
“While Somerfield has been improving, Iceland is struggling,” he said. “It’s not a section of the market I’d be rushing into.”
Fitch Ratings senior analyst Jonathan Pitkänen was equally sceptical about a tie-up: “The track record of both companies on mergers is not encouraging.”