The end of Woolies?

The prospect of Woolworths vanishing from the high street is increasing as Naghshineh mulls a counter bid to Hilco's £1 offer. Simon Evans and Nick Clark report

Ardeshir Naghshineh, the commercial property investor who owns a 10 per cent stake in Woolworths, is thought to be in talks with another entrepreneur to make a joint bid to buy the high-street chain.

Mr Naghshineh, who is the retailer's biggest stockholder, is believed to have spoken to a "prominent financier" about tabling a joint offer for the group. This could derail the £1 offer for the Woolworths' high-street assets which emerged yesterday and is understood to have been tabled by the turnaround specialists Hilco.

Any deal would let the curtain fall on almost a century of history for one of the high street's most recognisable stores, the first of which was opened by its American owners in Liverpool in 1909. A source said: "Mr Naghshineh believes the balance sheet of the company is much stronger than many people are giving credit. There remains property assets owned and leased by the firm that are being severely undervalued."

Mr Naghshineh and other large investors in the retailer, including the Icelandic group Baugur, are thought to be incensed at the Hilco bid, according to insiders.

Woolworths confirmed reports it had been approached yesterday morning, but declined to name the suitor. The retailer's board announced it was "in preliminary discussions regarding a possible offer for the retail business" which includes its network of 815 stores across Britain.

Later in the day, Paul McGowan, Hilco's chief executive in the UK, confirmed his company was in talks with Woolworths over a potential deal, but said that they were in the "very early stages". Woolworths is currently understood to only be in talks with Hilco, despite an approach from a rival consortium earlier this year. The nominal £1 deal would see the US group saddled with Woolworths' extensive debts – which sat at £286m in September – as well as the £160m-a-year rent on the stores. There are also negotiations over the company's pension deficit, valued at £58.2m.

The news of Hilco's offer was met with dismay in the market yesterday, as the shares plunged almost 40 per cent, dangerously close to penny stock territory. It closed at 2.35p.

John Stevenson, an analyst at KBC Peel Hunt, said that any bidder faced an uphill battle to turn around the business. "For a potential buyer, after the high debt burden and pension funding requirements, which may stretch beyond the deficit, the 800-store base and £160m-plus rent bill remains a major stumbling block," he said. "Indeed, we struggle to see a strong market for store disposals in the coming year. The chances of a successful deal being concluded remains quite doubtful to us, although equally, the group's finance providers will be facing a bleak year ahead in 2009."

Last month, Deloitte, the accountancy group, was appointed to conduct a review of Woolworths by leading creditors to the retailer, the banks Burdale Financial and GMAC Commercial Finance. The two financial groups headed a syndicate that approved a new four-year lending facility to Woolworths worth £385m in January. As lead creditors, they must approve any potential takeover and it is understood that discussions between the parties are underway. Sources close to Burdale, a Bank of Ireland subsidiary, said last month that the group was keen to see Woolworths remain a going concern but ceded that a break-up was possible in certain circumstances.

The group has been in decline since its shares peaked at 55p in 2005, but has especially struggled to deal with the onset of the credit crunch. There are now just five weeks left of the pre-Christmas shopping period, a time when companies like Woolworths traditionally book the largest amount of revenue for the year. Last month, a Panmure Gordon analyst, Philip Dorgan, said the consumer environment was "the worst for more than 30 years" and he picked Woolworths as the most vulnerable retailer on the high street.

The emergence of a possible bid from Mr Naghshineh is the latest twist in the Woolworths saga. Earlier in the year, the Woolworths chairman, Richard North, rejected a take-over bid of £50m for its stores from a consortium fronted by Malcolm Walker, the founder of the Iceland food chain. The bidders also included Baugur, although the crisis in its home market of Iceland is thought to have forced the company to put its plans on ice.

In the spring, Woolworths' then chief executive, Trevor Bish-Jones, was forced out of the top job by Mr North. He was replaced by Steve Johnson, the former Focus DIY chain boss, who took up his new role in September. Just weeks after his arrival, Mr Johnson was forced to unveil "unacceptable" first-half losses at the retailer nearing £100m, and announced it was to scrap its dividend. At the time its auditors questioned "the company's ability to continue as a going concern". The group announced shortly after Mr Johnson's arrival that six directors were to leave as part of his plans to restructure the business. Analysts at the time were vocal in their fear for the group's future, and Numis said Mr Johnson had the "toughest of retail challenges on his hands".

This came shortly after Euler Hermes, Atradius and Coface, the UK's top credit insurers, withdrew cover for suppliers to trade with the group, hindering its attempts to fully stock stores in the run-up to Christmas.

Mr Stevenson, of KBC, remains unconvinced about its future prospects, despite the strong performance from other cut-price retailers such as Poundland and Home & Bargains. "We would be surprised to see Woolworths transform its fortunes in its current form; a smaller store base and range changes are likely necessary to our minds," he said.

The heart of the high street: Woolworths in trouble

The potential takeover of Woolworths, or at least its retail arm, marks the latest twist in almost 100 years of ups and downs on the UK high street. Frank Woolworth opened the first English branch of his Pennsylvanian convenience stores in 1909 in Liverpool, after noting in his diary that "a good penny and sixpence store, run by a live Yankee, would be a sensation here".

He was proved right with newspapers at the time reporting queues around the block, as customers stripped the shelves bare before the end of trading on the first day.

Woolies grew its presence at the heart of the high street over the following decades and hit its peak in the 1960s, when it operated more than 1,000 stores across the UK.

That was to prove the high water mark, as the financial turbulence of the 1970s saw the group's decline until it was sold in 1982 to Paternoster Stores, the forerunner of Kingfisher group.

Woolworths tried and failed with several concept stores throughout the 1990s and, after Kingfisher was gazumped by Wal-Mart in a bid for Asda, it decided to spin off its merchandise business.

This led to Woolies refloating at 30p in 2001, with the management team of Trevor Bish-Jones as chief executive and Gerald Corbett as chairman. It peaked in April 2005 at 55p, but suffered a steady decline in the following years after issuing the first in a series of profit warnings months later.

So far 2008 has proved pretty turbulent, and it is likely that there will be more to come before the group can celebrate its centenary.

Nick Clark