The Rise and Fall of a Retail KingJames Thompson
Jon Asgeir Johannesson, the chairman of Baugur, opened the first Bonus supermarket in Reykjavik in 1989. During the following two decades, he created Baugur and built a sprawling retail empire though a binge of acquisitions and share purchases. At the turn of last year, it owned or held stakes in about 10 per cent of the UK high street, its tentacles enveloping retailers including Iceland, the frozen food specialist, Hamleys, the toy retailer, and House of Fraser, the department store.
Yesterday Baugur filed for bankruptcy protection in Iceland, in effect bringing to an end the Viking invasion of the UK high street. Speculation had always been rife about the fragility of Baugur's financial foundations, but few could have predicted it would come to such a calamitous end. Nick Bubb, an analyst with Pali International, said: "People always thought that Baugur was a pack of cards that would collapse, and eventually they were proved right."
So what went wrong?
Baugur's pain can be largely attributed to the Icelandic banking crisis, but the retail investment group also dug its own grave with a deeply flawed strategy. For instance, it hugely overpaid for weak retail chains; bought stakes in some of the high street's most precariously balanced retailers, including Woolworths; created an unwieldy portfolio of unrelated brands; and, perhaps most significantly, loaded up its companies with too much debt. Bryan Roberts, the global research director at Planet Retail, said: "I did not see the rationale for Hamleys and Iceland being in the same stable. I struggled to see the logic of some of [Baugur's] acquisitions."
No doubt some of Baugur's investments, notably Iceland and House of Fraser, were wise moves, but too often it laid hefty bets on the wrong horse. For example, its listed investments read like a who's who of the UK high street's travails. Baugur's strategy was to buy stakes in fashion-related retailers in order to gain influence over their strategy. It bought shareholdings in Debenhams, French Connection, Woolworths and Moss Bros, and although it sold its stake in Moss Bros last year it has lost its shirt on all these listed investments. Mr Bubb says: "They had some big punts on retail recovery stock that did not recover – Woolworths and French Connection to name a few."
Its record among privately held retailers is not great either. In 2004, Baugur bought the 177-store discount fashion chain Mk One for £55m, which included debt of £11m. Baugur vowed to turn the company into a powerhouse, but it was flattened by Primark. In May 2008, Mk One fell into administration.
Similarly, in 2005 Baugur paid £21.4m for Whittard of Chelsea, the coffee and tea specialist. It vowed to expand the chain and deliver economies of scale with its stable's health-snack retailer, Julian Graves. But it sold Julian Graves to rival Holland & Barrett in September 2008, and just before Christmas Whittard of Chelsea was bought out of pre-pack administration by a private-equity backed consortium.
Once again, Baugur lost most, if not all, of its investment in Whittard, which was one of the first of its chains to be hit by the Icelandic banking crisis.
With private companies, Baugur's strategy was not to acquire a retailer outright, but to become the dominant shareholder in a consortium that purchased a chain. The investment group always said its plan was to let a retailer's management team get on with the day-to-day running of the business. Bosses at the Baugur-backed companies tended to speak to Gunnar Sigurdsson, Baugur's chief executive, every week.
But any micro-problems with weak chains it suffered were mere tremors compared to the Icelandic banking earthquake that started to shake the country in the autumn. Mr Roberts said: "[Baugur's demise] is about the financial crisis and Icelandic banks – it has little to do with trading on the high street."
Problems first began to emerge in October 2008 with the nationalisation of Glitnir, whose biggest investor, Stodir, subsequently filed for administration. Stodir was controlled by Mr Johannesson. This was followed by the collapse of Landsbanki and Kaupthing, which were both lenders to Baugur and oiled the wheels of some of its deals.
From October, Baugur – through its PR machine – mounted a rearguard action, denying that it was in trouble. In October, Mr Sigurdsson said: "We have no plans to place our UK business into administration." Baugur and the management of its respective retail chains always asserted that the day-to-day operations of its UK retail companies were separate from the investor's shareholdings. However, credit insurers became frightened by the situation in Iceland and withdrew cover on most of Baugur's chains, which put pressure on its working capital and ability to purchase stock. The dynamics for Baugur of servicing its debt also worsened.
While the future of the Baugur-backed retail chains is unclear, the dream for its top brass and their opulent lifestyles appears to be coming to an end. It emerged at the weekend that Baugur is to close its head office in Reykjavik, while staff at its London office are also expected to leave in the spring.
The personal finances of Mr Johannesson are unclear, but he is unlikely to be attending retail charity dinners in the near future, where he previously used to splash the cash. Like many victims of the credit crunch, Baugur's fall from grace has been brutal and swift. Only last August, it joined Malcolm Walker, the chief executive of Iceland, the frozen food retailer, in making an offer to buy Woolworths' retail division for around £50m. At the time it claimed it had enough finances to do a deal. But it did not come off and two months later its Icelandic banking chickens started to come home to roost. Mr Bubb says: "They were Viking marauders who borrowed too much money and got it wrong."