News - Midlands
COVER STORY: Vikings of the high street
SENDING TREMORS THROUGH THE HIGH STREET
Icelandic group Baugur has taken the UK High Street by storm over the past year, acquiring several businesses - many based in the Midlands - and using Midlands advisers to boot. In an exclusive interview, Insider editor Jim Pendrill was granted an audience with Baugur's chief financial officer Gunnar Sigurdsson
Everything I had read about Baugur forewarned me that this Viking raider ran a lean and mean ship. However, I was still not quite prepared for what greeted me - or rather didn't - at the UK head office.
Now for a company that buys up a huge chunk of the UK retail industry in the space of a few months there's only one place you're going to be based - the industry's heart. So, just a stone's throw from Oxford Circus and down the suitably upmarket New Bond Street one wanders into the prestigious Renoir House.
Armed with my photographer and designer, we make a distinctly odd trio as we survey the gilded staircase and walls en route to the lift, not least because, being creative types, they are dressed considerably more casually than myself.
As the lift opened at the third floor what strikes immediately is that the ornate surrounds have gone. In their place are whitewashed walls, plenty of large glass windows and an open plan office that appears to have taken the concept of 'open' to its natural limit.
What strikes secondly is that there is no-one to greet us. A reception area yes, but no sign of a receptionist. All we can see are a couple of people chatting in the distant corner, one dressed in a black T-shirt and the other wearing an untucked casual shirt and jeans, who look at best like they may be from the IT department.
We wait a few minutes, nothing happens. I decide my interview slot is tight enough as it is and I've no time to waste, so I venture around a corner and find a nice young lady to ask for the whereabouts of my interviewee, a certain Gunnar Sigurdsson, Baugur's chief financial officer.
"Oh, he's sitting over there in the corner, he won't be a minute," says the lady. It turns out that my T-shirt wearing IT guy is actually the second most powerful person at one of the most powerful groups in British retailing. It also turns out that the chap he's speaking to is the most powerful person at one of the most powerful groups in British retailing, namely Jon Asgeir Johannesson, Baugur's CEO. My excuse for not recognising Jon is that he had his back to me. Then again, his famous long locks should have been a bit of a giveaway.
So, rather than interrupt, I decide it's best to leave the two alone. Ten minutes later Gunnar, who had clearly noticed us out of the corner of his eye, walks over to us apologetically while Jon goes in the opposite direction (and for the purposes of this interview is sadly not seen again).
As Gunnar welcomes me into the boardroom, I am immediately struck by his size. Put simply, he's a big man, with his T-shirt only accentuating further his particularly wide shoulders.
It goes without saying that he speaks perfect English too, hardly surprising given that he left Iceland 10 years ago to study an MBA in the United States. He then went on to work in the banking industry in the US and then later in Europe before joining Baugur in July 2003.
He is also, he revels in telling me later, typical of the kind of young, thrusting executive who runs so many of Iceland's biggest companies. The reason is simple. Ten years ago the country opened itself up to a market economy (another reason too for the wider growth of Baugur) and it was Iceland's Generation X that was prepared to take on the opportunities while the old guard of middle-aged executives sat back. For Gunnar, going to the US was simply the logical thing to do.
After his international sojourn he eventually returned home in the late 1990s to join Icelandic bank Fjarfestingabanki Atvinnulifsins. Given that Iceland isn't the biggest country in the world, it was only a matter of time before he would then cross paths with Jon Asgeir who had already made a name for himself after founding the Icelandic retail chain Bonus with his father in the late 1980s.
As father-of-two Gunnar, who at 35 is just a year younger than Jon Asgeir, recalls: "I started working with Baugur on a lot of different projects and knew what they were trying to do in the UK. When I was approached by Jon to join him it was a really good fit for me."
So, just what was Baugur trying to do in the UK at the time? The answer is a heck of a lot. The spark had been an initially rather tentative foray into the UK retail sector in 2001, when Baugur took a stake in Arcadia, a business it knew well because of its operation of a Top Shop franchise back in Iceland.
Baugur admits that the investment was opportune. Within a year its 40p shares had turned into a 418 pence investment thanks to Philip Green's purchase of Arcadia. Baugur itself had entered the bidding war for the group, but its £355m windfall more than made up for the disappointment.
What the sale did do was allow Baugur to invest in a range of UK retailing groups including Somerfield, House of Fraser and the Big Food Group.
At the time Gunnar joined the business, questions were starting to be asked about Baugur's intentions. Were the stakes being taken with the aim of eventually buying out the groups to then incorporate them into a bigger portfolio of brands? Or were they just opportunistic, holding stakes?
The answer appears to depend on the investment. For instance, through its BG Capital vehicle, Baugur continues to deliberately invest in possible takeover targets, while at the same time it is happy to discard of stakes if it sees fit.
Just days after I met Gunnar, Baugur disposed of its stake in House of Fraser at the same time as Scottish entrepreneur Tom Hunter. Last year, the two parties were rumoured to be considering a bid for the group. Instead Baugur walked away with about £310m in profit and raised about £330m.
Baugur also originally didn't seem too keen to do much with its 22 per cent in the Big Food Group, which owns the Iceland and Booker cash and carry chains. However, just days after this interview Baugur confirmed that it might bid outright for the group, but some analysts still believe a deal is unlikely. In terms of its minority stakes, Baugur also has a 3.5 per cent stake in Somerfield, the supermarket group.
Meantime away from all the speculation Baugur has been much happier simply buying other UK retail investments outright. The surge in activity began just weeks after Gunnar's arrival when Baugur splashed out £358.7m on buying toy group Hamleys, a deal which Gunnar today describes as a "one-off".
"In some respects Hamleys fitted our general criteria for doing a deal in that it has a fantastic brand name and is a very good business. But that said, our ambitions since have been far more on the fashion and food side where Baugur's traditions lie."
These ambitions seemingly have no bounds. With a wry smile, Gunnar admits he didn't realise quite how active Baugur would be in the months after his arrival.
Indeed, while the City was distracted with watching the stakes that Baugur had built up in various retailers, the company went for the jugular and caught the City by surprise, buying up a string of retailers.
The landmark deal would prove to be the £3152m takeover in November last year of women's fashion chains Coast and Oasis, a deal which really signalled Baugur's intentions on the High Street. The deal enabled Baugur to establish a wider Oasis fashion group into which it would subsequently fit the Karen Millen and Whistles businesses, which it took over for £3120m in June this year.
In between all those deals the company also acquired two well-known Midlands businesses. No sooner had the ink dried on the original Oasis deal than it took over Kingswinford-based health food business Julian Graves, the UK's largest independent specialist snacks and ingredients retailer.
And then in May this year it snapped up one of the Midlands' fastest growing companies as ranked by Insider's own research, namely Leicester-based jeweller Goldsmiths.
Gunnar says Goldsmiths (see page 55) is a perfect example of an investment fitting nicely within the Baugur model. "They have a strong and capable management team, a good brand name and the business is only on the High Street. We see plenty of opportunities on the jewellery side too, especially as jewellery is going more and more into the fashion side."
But is the Baugur acquisition plan going to stop there or is there still more to come?
The day we meet speculation is rife that Baugur is mulling a £390m deal to buy retailer Hobbs from Barclays Private Equity, a deal which analysts argue would nicely complete the Oasis set. Hobbs, which sells footwear, women's clothing and accessories, has 54 stores across the country and would appear a perfect fit.
Indeed, just days later Baugur does throw its hat into the ring and confirms it is lining up against private equity players that have got their eye on Hobbs.
However, when we meet, Gunnar appears to rule out any imminent deal given the length of time the bidding process will take.
"We will not be adding another brand next month if that's what you mean," he answers in response to my question over whether there are any more deals on the horizon.
What about numbers though, can he say how many more businesses Baugur will bring into its portfolio in time?
"We are undecided as to how many more we will do. The opportunities and potential to do deals is still there and there are good opportunities on the buying side. Our model is still developing too." However, he goes on to revealingly add: "These are just steps in a longer journey and we obviously don't want to stand still."
That said, Gunnar hints that the great deals may no longer be around in quite the number they were, although he admits that there are "always owners looking to get out".
"The retail market has been very active over the past few years and there have been some fantastic opportunities to acquire businesses for reasonably low prices. However, prices have come up in some sectors."
Instead, Gunnar is keen to stress that the company mustn't try to run too fast and it is important that it now beds down the investments it already has. "We have achieved what we wanted so far and we have a very well balanced portfolio, but there is a lot of work to do in developing that portfolio. Karen Millen was a good example of how we envisage growing our portfolio. We are not adding companies to our portfolio just for the sake of it, we are adding them because there are opportunities to grow these businesses either organically or through acquisitions.
"The Karen Millen acquisition was a big one for the wider Oasis group. Oasis has already had good success in terms of buying opportunities and we think Karen Millen can enhance that further. As we speak there is a lot of work going on in terms of managing the portfolio and working with management teams on ideas."
Given its quasi-private equity investor status, working with management teams is crucial for Baugur. It may be stating the obvious, but when you have just splashed out on half a dozen businesses virtually simultaneously, from a purely logistics point of view you are putting a massive amount of faith in those teams to deliver. "I need a lot of focus," admits Gunnar in a masterstroke of understatement.
However, Gunnar also stresses that Baugur cannot be bracketed as a pure private equity investor, although he admits its exit timeframes are clearly similar. "Our biggest strength is that we are retail operators by trade. We can bring to the table connections and experiences that set us apart from traditional PE players and we have a good ear to the retail ground. Our aspirations are to develop our retail opportunities to the full and generate investment returns and if that can be done in three to five years, then great. If not, we are not going to be unduly worried. We are not looking for an exit after three years if there is more to come from the business."
Whether Baugur has overstretched itself too fast too soon remains to be seen, and the company would certainly have been put to the test after a miserable summer for retailers. The combination of poor weather, terrorist threats and rising interest rates have certainly dampened demand significantly in recent weeks, though Gunnar plays down talk that the UK retail sector is heading for a mighty fall.
"As I said before, we are in for a long journey. It is quite clear there will be ups and downs along the way and different trading environments. What I can say is that looking forward we are optimistic that the market will be robust for the foreseeable future. For instance, July was a difficult month for us like it was for others, yet some of our businesses still experienced very strong growth while others have been affected more. But by and large our businesses are performing well."
Gunnar's confidence is clearly matched by those who have backed Baugur's spending spree. I suggest that UK funders have infact shown quite remarkable faith in the company, but Gunnar doesn't see it that way. "Banks here have now worked with us extensively, they have seen how we operate and seen what we bring to the table. From their point of view it is not that extraordinary at all. They see the potential of our portfolio to grow."
So, the rest of the High Street had better watch out. These IT guys haven't finished yet
For the fuller picture,
subscribe to Insider
every month.
Icelandic group Baugur has taken the UK High Street by storm over the past year, acquiring several businesses - many based in the Midlands - and using Midlands advisers to boot. In an exclusive interview, Insider editor Jim Pendrill was granted an audience with Baugur's chief financial officer Gunnar Sigurdsson
Everything I had read about Baugur forewarned me that this Viking raider ran a lean and mean ship. However, I was still not quite prepared for what greeted me - or rather didn't - at the UK head office.
Now for a company that buys up a huge chunk of the UK retail industry in the space of a few months there's only one place you're going to be based - the industry's heart. So, just a stone's throw from Oxford Circus and down the suitably upmarket New Bond Street one wanders into the prestigious Renoir House.
Armed with my photographer and designer, we make a distinctly odd trio as we survey the gilded staircase and walls en route to the lift, not least because, being creative types, they are dressed considerably more casually than myself.
As the lift opened at the third floor what strikes immediately is that the ornate surrounds have gone. In their place are whitewashed walls, plenty of large glass windows and an open plan office that appears to have taken the concept of 'open' to its natural limit.
What strikes secondly is that there is no-one to greet us. A reception area yes, but no sign of a receptionist. All we can see are a couple of people chatting in the distant corner, one dressed in a black T-shirt and the other wearing an untucked casual shirt and jeans, who look at best like they may be from the IT department.
We wait a few minutes, nothing happens. I decide my interview slot is tight enough as it is and I've no time to waste, so I venture around a corner and find a nice young lady to ask for the whereabouts of my interviewee, a certain Gunnar Sigurdsson, Baugur's chief financial officer.
"Oh, he's sitting over there in the corner, he won't be a minute," says the lady. It turns out that my T-shirt wearing IT guy is actually the second most powerful person at one of the most powerful groups in British retailing. It also turns out that the chap he's speaking to is the most powerful person at one of the most powerful groups in British retailing, namely Jon Asgeir Johannesson, Baugur's CEO. My excuse for not recognising Jon is that he had his back to me. Then again, his famous long locks should have been a bit of a giveaway.
So, rather than interrupt, I decide it's best to leave the two alone. Ten minutes later Gunnar, who had clearly noticed us out of the corner of his eye, walks over to us apologetically while Jon goes in the opposite direction (and for the purposes of this interview is sadly not seen again).
As Gunnar welcomes me into the boardroom, I am immediately struck by his size. Put simply, he's a big man, with his T-shirt only accentuating further his particularly wide shoulders.
It goes without saying that he speaks perfect English too, hardly surprising given that he left Iceland 10 years ago to study an MBA in the United States. He then went on to work in the banking industry in the US and then later in Europe before joining Baugur in July 2003.
He is also, he revels in telling me later, typical of the kind of young, thrusting executive who runs so many of Iceland's biggest companies. The reason is simple. Ten years ago the country opened itself up to a market economy (another reason too for the wider growth of Baugur) and it was Iceland's Generation X that was prepared to take on the opportunities while the old guard of middle-aged executives sat back. For Gunnar, going to the US was simply the logical thing to do.
After his international sojourn he eventually returned home in the late 1990s to join Icelandic bank Fjarfestingabanki Atvinnulifsins. Given that Iceland isn't the biggest country in the world, it was only a matter of time before he would then cross paths with Jon Asgeir who had already made a name for himself after founding the Icelandic retail chain Bonus with his father in the late 1980s.
As father-of-two Gunnar, who at 35 is just a year younger than Jon Asgeir, recalls: "I started working with Baugur on a lot of different projects and knew what they were trying to do in the UK. When I was approached by Jon to join him it was a really good fit for me."
So, just what was Baugur trying to do in the UK at the time? The answer is a heck of a lot. The spark had been an initially rather tentative foray into the UK retail sector in 2001, when Baugur took a stake in Arcadia, a business it knew well because of its operation of a Top Shop franchise back in Iceland.
Baugur admits that the investment was opportune. Within a year its 40p shares had turned into a 418 pence investment thanks to Philip Green's purchase of Arcadia. Baugur itself had entered the bidding war for the group, but its £355m windfall more than made up for the disappointment.
What the sale did do was allow Baugur to invest in a range of UK retailing groups including Somerfield, House of Fraser and the Big Food Group.
At the time Gunnar joined the business, questions were starting to be asked about Baugur's intentions. Were the stakes being taken with the aim of eventually buying out the groups to then incorporate them into a bigger portfolio of brands? Or were they just opportunistic, holding stakes?
The answer appears to depend on the investment. For instance, through its BG Capital vehicle, Baugur continues to deliberately invest in possible takeover targets, while at the same time it is happy to discard of stakes if it sees fit.
Just days after I met Gunnar, Baugur disposed of its stake in House of Fraser at the same time as Scottish entrepreneur Tom Hunter. Last year, the two parties were rumoured to be considering a bid for the group. Instead Baugur walked away with about £310m in profit and raised about £330m.
Baugur also originally didn't seem too keen to do much with its 22 per cent in the Big Food Group, which owns the Iceland and Booker cash and carry chains. However, just days after this interview Baugur confirmed that it might bid outright for the group, but some analysts still believe a deal is unlikely. In terms of its minority stakes, Baugur also has a 3.5 per cent stake in Somerfield, the supermarket group.
Meantime away from all the speculation Baugur has been much happier simply buying other UK retail investments outright. The surge in activity began just weeks after Gunnar's arrival when Baugur splashed out £358.7m on buying toy group Hamleys, a deal which Gunnar today describes as a "one-off".
"In some respects Hamleys fitted our general criteria for doing a deal in that it has a fantastic brand name and is a very good business. But that said, our ambitions since have been far more on the fashion and food side where Baugur's traditions lie."
These ambitions seemingly have no bounds. With a wry smile, Gunnar admits he didn't realise quite how active Baugur would be in the months after his arrival.
Indeed, while the City was distracted with watching the stakes that Baugur had built up in various retailers, the company went for the jugular and caught the City by surprise, buying up a string of retailers.
The landmark deal would prove to be the £3152m takeover in November last year of women's fashion chains Coast and Oasis, a deal which really signalled Baugur's intentions on the High Street. The deal enabled Baugur to establish a wider Oasis fashion group into which it would subsequently fit the Karen Millen and Whistles businesses, which it took over for £3120m in June this year.
In between all those deals the company also acquired two well-known Midlands businesses. No sooner had the ink dried on the original Oasis deal than it took over Kingswinford-based health food business Julian Graves, the UK's largest independent specialist snacks and ingredients retailer.
And then in May this year it snapped up one of the Midlands' fastest growing companies as ranked by Insider's own research, namely Leicester-based jeweller Goldsmiths.
Gunnar says Goldsmiths (see page 55) is a perfect example of an investment fitting nicely within the Baugur model. "They have a strong and capable management team, a good brand name and the business is only on the High Street. We see plenty of opportunities on the jewellery side too, especially as jewellery is going more and more into the fashion side."
But is the Baugur acquisition plan going to stop there or is there still more to come?
The day we meet speculation is rife that Baugur is mulling a £390m deal to buy retailer Hobbs from Barclays Private Equity, a deal which analysts argue would nicely complete the Oasis set. Hobbs, which sells footwear, women's clothing and accessories, has 54 stores across the country and would appear a perfect fit.
Indeed, just days later Baugur does throw its hat into the ring and confirms it is lining up against private equity players that have got their eye on Hobbs.
However, when we meet, Gunnar appears to rule out any imminent deal given the length of time the bidding process will take.
"We will not be adding another brand next month if that's what you mean," he answers in response to my question over whether there are any more deals on the horizon.
What about numbers though, can he say how many more businesses Baugur will bring into its portfolio in time?
"We are undecided as to how many more we will do. The opportunities and potential to do deals is still there and there are good opportunities on the buying side. Our model is still developing too." However, he goes on to revealingly add: "These are just steps in a longer journey and we obviously don't want to stand still."
That said, Gunnar hints that the great deals may no longer be around in quite the number they were, although he admits that there are "always owners looking to get out".
"The retail market has been very active over the past few years and there have been some fantastic opportunities to acquire businesses for reasonably low prices. However, prices have come up in some sectors."
Instead, Gunnar is keen to stress that the company mustn't try to run too fast and it is important that it now beds down the investments it already has. "We have achieved what we wanted so far and we have a very well balanced portfolio, but there is a lot of work to do in developing that portfolio. Karen Millen was a good example of how we envisage growing our portfolio. We are not adding companies to our portfolio just for the sake of it, we are adding them because there are opportunities to grow these businesses either organically or through acquisitions.
"The Karen Millen acquisition was a big one for the wider Oasis group. Oasis has already had good success in terms of buying opportunities and we think Karen Millen can enhance that further. As we speak there is a lot of work going on in terms of managing the portfolio and working with management teams on ideas."
Given its quasi-private equity investor status, working with management teams is crucial for Baugur. It may be stating the obvious, but when you have just splashed out on half a dozen businesses virtually simultaneously, from a purely logistics point of view you are putting a massive amount of faith in those teams to deliver. "I need a lot of focus," admits Gunnar in a masterstroke of understatement.
However, Gunnar also stresses that Baugur cannot be bracketed as a pure private equity investor, although he admits its exit timeframes are clearly similar. "Our biggest strength is that we are retail operators by trade. We can bring to the table connections and experiences that set us apart from traditional PE players and we have a good ear to the retail ground. Our aspirations are to develop our retail opportunities to the full and generate investment returns and if that can be done in three to five years, then great. If not, we are not going to be unduly worried. We are not looking for an exit after three years if there is more to come from the business."
Whether Baugur has overstretched itself too fast too soon remains to be seen, and the company would certainly have been put to the test after a miserable summer for retailers. The combination of poor weather, terrorist threats and rising interest rates have certainly dampened demand significantly in recent weeks, though Gunnar plays down talk that the UK retail sector is heading for a mighty fall.
"As I said before, we are in for a long journey. It is quite clear there will be ups and downs along the way and different trading environments. What I can say is that looking forward we are optimistic that the market will be robust for the foreseeable future. For instance, July was a difficult month for us like it was for others, yet some of our businesses still experienced very strong growth while others have been affected more. But by and large our businesses are performing well."
Gunnar's confidence is clearly matched by those who have backed Baugur's spending spree. I suggest that UK funders have infact shown quite remarkable faith in the company, but Gunnar doesn't see it that way. "Banks here have now worked with us extensively, they have seen how we operate and seen what we bring to the table. From their point of view it is not that extraordinary at all. They see the potential of our portfolio to grow."
So, the rest of the High Street had better watch out. These IT guys haven't finished yet
For the fuller picture,
subscribe to Insider
every month.