Baugur: the iceman cometh...

First Oasis, then Karen Millen and Hamleys. Baugur, the Icelandic retail investment group, has already bought a string of familiar names from the British high street, but a successful tilt for Woolworths would result in its biggest acquisition here yet.

Some City analysts wrote off Woolworths as a lost cause a long time ago. But Malcolm Walker, chief executive of the frozen food specialist Iceland, and Baugur, the Icelandic retail investment group, clearly have not, and this weekend it emerged that they had made an offer to purchase Woolworths' retail division. Woolworths rejected the offer yesterday.

While the outspoken and straight-talking Mr Walker, who was fired from Woolies 37 years ago for moonlighting when setting up Iceland, is a well-known figure in retail, a certain air of mystery still surrounds Baugur.

Founded by Jón Ásgeir Jóhannesson and his father in 1989, the company has been built up through a string of acquisitions and mergers – of which Woolworths could be just the latest.

Mr Jóhannesson remains chairman of the company to this day, despite being convicted in 2005 of charges related to dealings between himself and Baugur. While he has appointed a chief executive, the founder remains the company's driving force and he will have been closely involved in the view that there may still be some value in the ailing Woolworths.

By the turn of 2008, Baugur had gone on a shopping spree that boasted strategic investments or controlling stakes in large swaths of the UK high street. Its tentacles have enveloped retailers including Iceland, the department store House of Fraser, Aurum Holdings' Goldsmiths and Mappin & Webb jewellery chains, the womenswear chain Jane Norman and Mosaic Fashions, the fashion conglomerate of Karen Millen, Oasis, Principles, Coast and Warehouse.

The bulk of its UK investments are in private companies, but Baugur has taken a series of strategic stakes in publicly listed companies which it believes have strong brands and growth potential. However, eyebrows have been raised at some of its investments in struggling listed companies, such as Woolworths and French Connection. The Shore Capital analyst, John Stevenson, says: "These stakes will be underwater." Baugur also has a stake in Debenhams.

However, it is in the private sector that Baugur's operating model has come to the fore. Typically, Baugur does not acquire outright a retailer itself, but is the dominant shareholder in a consortium that purchases a chain.

Baugur's own philosophy on its retail investments is to let the management teams get on with the day-to-day job of running the business. Bosses at the Baugur-owned businesses tend to speak to Gunnar Sigurdsson, Baugur's chief executive, every week, and there are board meetings with Baugur and the various brands' chief executives each quarter.

However, one criticism of Baugur is that its UK retail portfolio has become unwieldy and there is "not a cohesive strategy", said an industry source. But Baugur stresses that the overwhelming majority of its investments are in food, department stores and fashion chains. To name just a few synergies, Baugur highlights the fact that it can sell clothes from chains, such as young trendy chain All Saints or Moss Bros, into House of Fraser, for example, and that its brands can benefit from shared e-commerce technology and services. The Icelandic investment group also cites that Baugur's international presence – given its experience and investment in US retailers – provides it with a huge platform to further export its brands overseas. Fashion chains, such as Karen Millen and Oasis, are already operating in a plethora of different countries, and last week Baugur said it was launching Hamleys into India, after the opening of stores in Amman, capital of Jordan.

However, the performance of some of its investments has left it with egg on its face. Arguably its biggest failure to date was the collapse of the value fashion chain MK One into administration in May. Baugur bought the chain in 2004, but it failed to deliver a compelling offer and never found a formula for competing against the big beast of Primark.

Mr Stevenson says: "Their retail investments have been a mixed bag, [although] there have been successful ones."

Of its successes, Iceland, which has grown profits and sales since Malcolm Walker returned in 2005 to run it, Hamleys and House of Fraser are the ones that are most often mentioned.

Given the scale of its retail investment in the UK, Baugur is likely to be finding life tough in the UK retail sector amid the current grim trading on the high street. However, the com-pany is adamant that it is under no pressure to cash in on any of its investments like a private equity company, whose shareholders expect them to sell businesses within several years of acquisition. In fact, anyone who thinks that Baugur may be about to skulk back into a bunker and lick a few of its wounds may be sorely disappointed, for two reasons. First, Baugur had amassed a £430m war chest in April, when it revealed it had divested its media and technology investments to two new independent companies.

Baugur's finances have always been a constant source of industry speculation. One industry source said: "It is very difficult to see what is going on with the underlying strategy, which is probably what they want." What's not in doubt, however, is that Baugur has the money to mount a credible bid for Woolies should it return to the table.

Second, Baugur believes there are some retailers on the high street, whose valuations have plummeted over the past year, which represent bargains that it would consider making a bid for at the right price.

Baugur declined to comment on Woolworths. But contrary to the current speculation swirling around the approach for Woolworths, it is understood the consortium's main focus is not on putting frozen food into a large number of Woolworths stores. Rather, Baugur and Mr Walker are thought to have identified that Woolworths' retail division – which generated a paltry adjusted pre-tax profit of £3.2m on sales of £1.7bn for the year to 2 February – could deliver greater profits if it is managed more efficiently, with better ranges and availability. It is also thought to believe that Woolworths needs a dedicated chief executive to run its retail business, along the line of discount rival Wilkinson, which is thriving in the current price-led retail downturn. Last week, Woolworths appointed the former Focus DIY boss Steve Johnson as chief executive to run the unwieldy group, with its entertainment wholesale division E.UK and 2 Entertain, its video publishing joint venture with the BBC. There is no indication of whether Baugur will come back with an improved offer.

Overall, Baugur may have stumbled with the performance of a few of its investments recently, but those who are already writing its obituary may have to eat humble pie for many a year to come.

Baugur's march down the high street

Founded as recently as 1989, Baugur has rapidly grown into a powerful retail investment company, with more than 4,000 stores globally and an annual turnover of £5bn.

But it was not until 2003 that Baugur started to acquire – typically through consortiums, where it is the dominant shareholder – or gain controlling interests in a substantial number of UK retailers. In 2003 alone, Baugur Group acquired the toy specialist Hamleys, the young fashion chain Oasis and the snack retailer Julian Graves.

Since then, Baugur has added to its shopping basket the department store House of Fraser, the tea andcoffee specialist Whittard of Chelsea and the jewellery chain Goldsmiths.

However, some of its investments have not performed well. MK One, which Baugur bought for £55m in 2004, fell into administration this year. This summer, Baugur effectively put up for sale the snack retailer Julian Graves after a strategic review, although it remains confident offinding a buyer. Baugur also holds strategic stakes in listed retailers, including the American department store Saks, and the UK store groups Debenhams, French Connection and Woolworths.

Of these, its 12.4 per cent investment in Woolworths and 20.9 per cent in French Connection havetumbled.

Last December, Baugur, which owns a 28.5 per cent stake in the menswear retailer Moss Bros, revealed it was considering launching a takeover bid, which progressed through the diligence phase untilcollapsing in May.