The auction for Iceland Foods has become a straight fight between private equity groups BC Partners and Bain, and Malcolm Walker, The Grocer can reveal.

BC Partners and Bain were in effect the only bidders left in the race, a City source said. Asda has pulled out and the source added: “While it is not totally clear, I think Morrisons will come out.”

Bain’s bid was dependent on running the business with the existing Iceland management team, the source added.

“Bain is very close to Iceland’s management ,” said the source. “But BC Partners is considering another team.”

Iceland founder Walker remains poised to exert his pre-emption rights and match any successful bid. And having only private equity groups left could both strengthen his position - and hit Landsbanki in the pocket, the source said. First-round private equity bids are thought to have hit £1.3bn.

Landsbanki wants £1.5bn for its 77% of shares, but the absence of the multiples could see second-round bids remain at first-round levels.

“If bids hit £1.5bn, then Walker won’t bother,” said the source. “At £1bn he will do it. “