Isosceles on verge of clinching sale of Wellworth to O'Reilly

ISOSCELES, the heavily-borrowed Gateway supermarkets group, is close to selling its Wellworth food and clothing stores to Fitzwilton, the industrial holding company controlled by Tony O'Reilly, the Heinz chief.

A deal could be clinched within the next few weeks, according to one source. But Isosceles is unlikely to receive as much as the pounds 150m it originally had pencilled in for the Ulster-based chain.

The deal comes as bankers become increasingly worried about the security of the pounds 1.1bn of Isosceles borrowings. The price of Isosceles' senior debt in the secondary market continues to fall.

Gary Klesch, of the debt broker Klesch & Co, said yesterday the going rate was 72p-76p for every pound of debt. A month ago it was in the eighties. Trade in the debt was 'beginning to pick up momentum', he said. 'It has the feel of one that's going to get worse. The banks are very unhappy.'

That was a sentiment echoed on Wall Street, where Isosceles debt is classed in the 'distressed' category. Some banks there are understood to be increasingly nervous.

The refinancing plan for Isosceles was overwhelmingly approved by all classes of shareholder at the annual meeting yesterday. Under the plan Isosceles has access to new mezzanine facilities of pounds 64m, its loan covenants are relaxed, preference shares are converted to ordinary shares and mezzanine lenders are given warrants over 20 per cent of the enlarged equity.

Ernest Sharp, chairman of Isosceles, speaking after the meeting, said of Wellworth: 'We'll sell it. We'll sell it shortly. And we'll sell it for a good price.' The proceeds will go towards paying off senior debt and financing the conversion of Gateway stores to other formats including Food Giant, Somerfield, SoLo, Gateway Village and David Greig.

Isosceles said there would be no problem repaying pounds 100m of senior debt, due in April. It categorically denied a report that it is already in talks on another refinancing. The main banks are Bank of Scotland, Midland and Warburg.

Fitzwilton, which itself is highly geared and has seen profits plunge, is thought to have an external financing partner for the purchase. It has experience of the grocery trade through its cashand carry operations in the UK.

Isosceles has at least two other possible purchasers lined up in case the deal with Fitzwilton falls through. In the summer it shelved plans to float the business because of poor stock market conditions.

Wellworth made operating profits of pounds 18.1m on sales of pounds 236m in the year to 25 April. But its operating margin shrank from 8.2 per cent to 7.7 per cent. It is valued in the books at pounds 114.7m.

Yesterday Isosceles also announced the sale of 12 small loss- making stores to Iceland Frozen Foods for pounds 2.7m, slightly more than their book value.

Bob Willett, chief executive of the main Gateway division, said like-for-like sales were running 1.7 per cent lower, partly because of temporary closures of stores as they are converted. However, margins were holding up well.

Analysts said the doubts about Isosceles should not worry manufacturers supplying on credit to Gateway and the other operating companies. Whatever the troubles at Isosceles, the operating companies would survive.