Tempestuous times for Baugur’s rising star
Elsevier Food International, Vol.9, No.1, February 2006 Jan Gerritsen
Although Jón Asgeir Jóhannesson, CEO of Iceland’s prime retail and investment company Baugur, spends most of his time in London, his English is still not without hesitations. In Iceland he generally keeps a low profile, which is quite a contrast with his activities as a businessman.
In 1989, Jóhannes Jónsson and his son Jón Asgeir Jóhannesson opened Bónus, Iceland’s first discount store. Bónus immediately won the hearts of Icelandic consumers. In 1993, Hagkaup – at the time the leading supermarket chain in Iceland – acquired a 50 per cent share in Bónus. In 1998, Hagkaup and Bónus merged as Baugur, with 30-year-old Jón Asgeir at the helm.
Seven years later, Jón Asgeir runs Iceland’s biggest multinational Baugur. This Icelandic retail and investment group controls the British Big Food Group and quite a number of well-known high street fashion stores in the UK. It employs some 51,000 people, mainly in the United Kingdom, and in 2004 had a turnover of UK£7.6 billion and net assets worth UK£4.2 billion. Apart from numerous investments in Icelandic and British companies, Baugur Group is also active in Denmark and many other countries. In Denmark, Baugur has a controlling stake in ‘Magasin du Nord’, the famous department store in Copenhagen.
Modest and aggressive
With his long hair and informal dress Jón Asgeir looks more like a Viking prince or a rock star than, what one might expect, a polished swagger whose name opens doors. He flies a Baugur private jet, yet is essentially a modest man. His house in central Reykjavik may be large by local standards but is certainly no match for the luxury mansions enjoyed by, for example, British business tycoons.
Since Jón Asgeir has been at the helm of Baugur, he has actively expanded the business. It took Baugur a few years before it dominated Iceland’s retail sector and having reached growth limits at home, Baugur in 2002 embarked on an aggressive expansion policy in Europe. In 1999 already Baugur had set up shop in the US. However, this ‘Bonus Dollar Stores’ operation turned out to be ill-fated and was divested in 2002 at a considerable loss.
The American adventure had one more consequence. His then business partner – Jón Gerald Sullenberger, a Miami-based businessman of Icelandic origin – turned into one of Jón Asgeir’s toughest opponents. Obviously frustrated by the outcome of his business venture with Baugur in the US, Sullenberger informed authorities in Iceland about supposedly irregular business practices by Jón Asgeir and Baugur. The police investigation that followed was to last three years. When the special criminal investigation squad of the Icelandic police raided the modest yellow painted Baugur Group office in an old part of Reykjavik in August 2002, Jón Asgeir was forced to withdraw from his partnership with the British retail tycoon Philip Green to take over Arcadia Group for a daring UK£770 million.
A blessing in disguise
It was a major setback but, to a certain extent, a blessing in disguise as Baugur sold its Arcadia shares to Green for more than the tenfold. This more than compensated for the costly divestment of its US operation. Jón Asgeir decided to buy back all shares and end Baugur’s listing on the Reykjavik stock market. The company is now private again, with his father Jóhannes, his sister Kristin and his girlfriend Ingibjörg Palmadottir (one of the three children of the former Hagkaup-owner) in the supervisory board of directors.
Baugur began its aggressive overseas expansion under a lucky star. Since 2002, economic growth has been steady in the United Kingdom and spectacular in Iceland (four per cent or more a year). Even more important was the switch Iceland made to really becoming an open-market economy, mainly as a result of its ‘European Economic Space’ agreement with the EU. The privatisation of state companies such as two major banks (the Bunadarbanki and Landsbanki in 2002) provided young energetic entrepreneurs like Jón Asgeir the freedom they had longed for. Moreover, it freed a lot of money too, as ambitious bank managers also wanted their share of the economic boom. And finally, the rich Icelandic pension funds were keen to invest large sums of money in shares.
Deals were clinched quickly, as in the small Icelandic business community one knew with whom one had to deal. Shares on the Icelandic stock market soared – an average of 60 per cent in 2004 alone – certainly also to the benefit of Baugur.
Jón’s network
Jón Asgeir has a network of, mostly British, business partners. One of them is Kevin Stanford, the British retailer who sold his Karen Millen fashion chain for UK£120 million to Baugur. The Scottish real-estate tycoon Tom Hunter is another partner. He taught Jón Asgeir the tricks of the trade in managing real estate.
In 2004 Baugur, in cooperation with British partners, bought the UK’s Big Food Group for UL£326 million. The Big Food Group is well known for its approximately 700 ‘Iceland’ frozen-food supermarkets and its 170 Booker Cash & Carry branches. The value of the shops and other real estate of Big Food was estimated to be around UK£280 million. Baugur, which has its own real estate company in the UK (called LXB), was to clinch a sale and lease back deal with this real estate after splitting the company in three parts. Such a deal sets huge sums of fixed capital free which can be invested in the core retail business.
Being basically a private family business, transparency in Baugur's financial structure is limited. The holding, led by Jón Asgeir, has a controlling stake in 24 companies and has invested in 81 others.’
Upon being asked about the financial structure of buyouts, Baugur’s press office said that in private equity transactions in the UK and other countries it finances buyouts with 1/3 equity and 2/3 debt. Some of Baugur’s funding has been provided by Icelandic banks but large transactions have also been funded by British banks including HBOS and Barclays. KB Banki, the biggest bank in Iceland and an investor in Baugur for many years, owns around eight per cent of Baugur. No other Icelandic banks or other financial institutions hold a stake in the company. The only foreign financier is Kevin Stanford who together with two Icelandic business partners owns approximately eight per cent.
According to these figures Jón Asgeir and his family own 84 per cent of the holding.
Baugur Group has a 24 per cent stake in FL Group (Icelandair and related companies) and Jón Asgeir is member of the board, as is his friend Hannes Smarason, CEO of FL Group, another young and successful Icelandic dealmaker who owns about 26 per cent of FL Group. Another investor in FL Group is, again, Kevin Stanford, who obviously feels comfortable in the “small but highly ambitious world of Icelandic business” – to quote the British weekly The Economist.
Enemies from the establishment
Baugur’s remarkable success, however, has also created resentment. The old political establishment which ruled Iceland for decades had become fearful of the power of Jón Asgeir and his smart Baugur-managers, many of whom were educated at American business schools. David Oddson – leader of the conservative Independence Party and prime minister for twelve years until September 2005 – warned Baugur that it was going to be scrutinised. The economic crime unit of the police began an investigation into Baugur’s practices in 2002. Not only did the Sullenberger accusations play a role but Baugur had developed into an influential force in the public debate in Iceland by taking over a media-company, controlling a popular TV–broadcasting company, a newspaper and a radio station, much to the resentment of the establishment.
The first police raid of the Baugur head office in Reykjavik in August 2002 was followed by many more, in Reykjavik, in the Faeroe Islands and even at the Kaupthing – now KB Bank – office in Luxemburg. Two hundred people were questioned. During the last two years of the investigation a bitter verbal dispute took place between Oddson and the Baugur-controlled ‘Frettabladid’, a free newspaper delivered to every house in Reykjavik, where one-third of the Icelandic population lives. In 2004, the government issued a law limiting ownership in media companies, which was clearly designed to curb Baugur’s influence. Parliament voted in favour but Iceland’s president Olafur Ragnar Grimsson vetoed the initiative – the first time ever in Iceland’s history that the head of state used this prerogative. Emotions ran high.
On 1 July 2005 – after three years of investigations – Jón Asgeir, his father Jóhannes, his sister Kristin, former Baugur CEO Tryggvi Jónsson and two KPMG accountants were accused of serious criminal charges. Jón Asgeir reacted indignantly. Two days after the indictments were handed out, he said to BBC radio, “It [the investigation] is shameful for Icelandic politics. I don’t think it is good for the Icelandic economy or Icelandic business life.” And, on another occasion: “No one has claimed to have suffered damage, yet we have been kept hostage for three years.”
The best soap since ‘Dallas’
Jóhannesson’s frustration may well be due to the feeling that his hands are tied as long as the accusations persist. In 2005 for instance, Baugur participated in the bidding process for UK retailer Somerfield, in which it already had a 5.5 per cent stake. However, like the Arcadia takeover in 2002, these plans were also cancelled due to the indictments of July 2005.
Baugur’s CEO diplomatically avoided the limelight dark most of the time but was unable to hide at the Reykjavik court in August 2005 when the special prosecutor, sitting beside the 20,000 documents that the investigators had amassed, came up with 40 charges of breach of trust, cooking the books and embezzlement, involving some UK£25 million. The charges all relate to Baugur’s stormy growth in Iceland during the years 1998 to 2002 when Baugur was still a listed company. Jón Asgeir and the other five defendants adamantly deny all charges.
Court proceedings at the Reykjavik District Court and Iceland’s Supreme Court are likely to take at least a year. Last October the High Court threw out all 40 indictments, judged to be not clear or conclusive. The district court later upheld eight indictments. The special prosecutor was later dismissed and replaced by a new one.
For many Icelanders the proceedings and the publicity around it were the best soap since ‘Dallas’. But the guns are still out and the battle continues. Baugur’s and Jón Asgeir’s greatest ‘public’ enemy, the former prime minister David Oddson, may have left the scene – he is now director of the Central Bank – but the stakes remain high for all parties involved.
Profile
Jón Asgeir Jóhannesson (1968) graduated from the Icelandic School of Commerce in 1989. In that year he and his father Jóhannes Jónsson set up the retail discount chain Bónus with Jón Asgeir as managing director. In 1998, he became CEO of Baugur Group and in May 2002 he took over as the company’s chairman of the board.
Company characteristics
Despite its roots in grocery retailing, Baugur Group is shifting its business towards non groceries. In 2000, grocery accounted for 74.4 per cent of the business and non grocery for 25.3 per cent. In 2004, these percentages were 42.1 (grocery) and 57.9 (non grocery). The lion’s share of Baugur’s business is in the UK (71 per cent). Its domestic market Iceland accounts for 18 per cent of the total business and 7.6 per cent of sales comes from Denmark. The remaining 3.4 per cent comes from other countries in Europe and the Middle East.
Sales by format (%, 2005) Total 2004 Sales: US$2,379m
| Format | % Share |
| Cash & Carries | 48.8 |
| Supermarkets & Neighbourhood stores | 19.1 |
| Convenience stores | 16.7 |
| Clothing stores | 5.4 |
| Jewellery stores | 3.3 |
| Department stores | 2.1 |
| Discount stores | 1.2 |
| Food service | 1.1 |
| Toy stores | 0.8 |
| Specialist food stores | 0.6 |
| Electrical goods stores | 0.5 |
| Sport/leisure stores | 0.3 |
| Pharmacies | 0.1 |
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