Iceland Foods Buyout Bidders Talk To Founder To Beat Trade Buyers -Sources

Private-equity firms bidding for Iceland Foods are talking to the U.K. retailer's founder, Malcolm Walker, as a way of defeating strategic buyers in the auction for the frozen-foods business, according to people familiar with the situation.

Iceland attracted six bids in the first round of the sale process. Buyout firms TPG Inc., Bain Capital LLC, BC Partners and Blackstone Group LP (BX) submitted bids, as did rival grocers Wm. Morrison Supermarkets PLC (MRW.LN) and Wal-Mart Stores Inc.-owned (WMT) Asda, which is working alongside Farmfoods, another frozen-foods retailer.

However, the buyout firms have been told that their bids need to be at least GBP1.5 billion to be competitive with the strategic buyers and, with a lack of debt to fund large leveraged deals, the financial bidders are talking to Walker with a view to bidding jointly.

Teaming up with Walker also would smooth the future management and operational performance of the business under any new owners.

Walker, who together with Iceland's Chief Operating Officer Andy Pritchard and Chief Financial Officer Tarsem Dhaliwel holds 23% of the company, has a pre-emptive right to buy by matching a winning bid. He has been talking to a number of rich individuals and investment firms, including private-equity firms, with a view to raising equity backing for a bid.

It isn't clear whether trade bidders such as Wm. Morrison and Asda would be allowed to retain the business in its entirety if they are successful in the auction. Antitrust restrictions likely would mean that either would have to divest some stores due to the retailers' market share.

Analysts have said that Morrison, which is the U.K.'s No. 4 supermarket and has a much smaller geographic footprint than its rivals, is the only retailer that in theory could make a full bid, although people familiar with the matter say it is likely to have to make divestments too. Credit Suisse Group (CS) is advising Morrison on the deal.

Asda, the U.K.'s No. 2 grocer, reportedly is being advised by Barclays Capital.

Iceland has about 796 stores across the U.K., 742 branded Iceland Foods, and 54 operating as Cooltrader. In June, the company reported annual earnings before interest, taxes, depreciation and amortization of GBP188 million, on revenue of GBP2.5 billion--a healthy margin of just under 8%. Recent trading figures suggest that the company has grown revenue and Ebitda over the last few months as discount retailers benefit from shoppers trading down.

UBS AG (UBS) and Bank of America Merrill Lynch are running the auction, and second-round bids are due in early January.

The banks were hired earlier this year to auction a 77% stake in the budget retailer by the resolution committee acting for failed Icelandic banks Landsbanki and Glitnir, which own 67% and 10% of the firm, respectively.

-By Marietta Cauchi, Dow Jones Newswires; +44 207 842 9241; marietta.cauchi@dowjones.com

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