Morrisons and Asda are unlikely to pursue their interest in Iceland Foods as the second round of the auction gets under way, according to a City source close to the deal.

The source claimed Morrisons was backed by Sainsbury’s and the Co-op Group, with Sainsbury’s set to receive 15 stores and the Co-op 25 as part of any deal.

But following through with an acquisition would be problematic for both supermarkets, the source claimed. It would lead to a competition review and
divestment of stores and the value of the brand would be broken up.

Restrictive licences also apply to about a third of the 776-strong portfolio, making them unsuitable for a general supermarket offer. If Morrisons and Asda withdraw, that would leave private equity out in front.

One private equity group had dropped out, with another three expected to bid up to £1.3bn, the source said.

Malcolm Walker told The Grocer this week he was confident of wrapping up a deal for Iceland by the middle of January.

“Landsbanki has to accept an offer from someone else, then we can match it,” said Walker, referring to his pre-emption rights to match any successful bid. “It will be a done deal by mid-January.”

But the City source suggested there may be no deal in the near future.

“The likely scenario is nothing happens soon,” said the source. “If Landsbanki has no acceptable offers by the end of round two there will be no
match and no sale. The existing Iceland management are happy with big salaries and a sizeable share of a successful company. They can hold out for a better deal.”

Kantar Worldpanel data shows Iceland is thriving. It posted growth of 11.6% for the 12 weeks to 30 October, its highest figure since 2008. And in June it reported that pre-tax profits had grown by 14.8% to a record £155.5m.

Speculation has been building over who will emerge victorious since Landsbanki announced it was selling its 67% share in Iceland in January. That figure increased to 77% when the 10% owned by Glitnir was added in September.