Asale to Warburtons or Premier is surely out of the question without a lengthy and potentially damaging investigation. But despite official denials, a well-placed source has confirmed that Associated British Foods is in "exclusive, confidential and advanced negotiations" to sell its bakery division, Allied Bakeries.

Squeezed by falling demand - despite a £14m relaunch of Kingsmill earlier this year that included a new product reformulation, four new sub-brands and redesigned packaging - increases in the price of wheat flour, and an apparent inability to pass on the costs to its customers, the Weston family appears to have been pursuaded that a sale is judicious.

As well as the successful nationwide expansion of Warburtons, confidence in Allied Bakeries' flagship brand Kingsmill has recently been rocked by several instances of malicious tampering at its Kent plant. The FSA and the police were called in after the discovery of deliberately planted objects such as glass, needles and chewing gum in the sliced loaves.

But despite an admission by ABF, earlier this month, that the division - whose brands also include Allison and Sunblest - continued to be loss-making, the news appeared to surprise the City, because of the timing.

"It could not be a worse time to sell," said one food analyst. "The business has lost a lot of money, wheat prices are at a record high and the private equity markets are paralysed because of the credit crunch. The obvious trade buyers such as RHM or Warburtons would be wary of making a move because it would inevitably trigger a trade inquiry. It seems like someone has come in with a speculative approach."

Others disagree. "The bread sale does make sense," says Charlie Mills at Credit Suisse. "Bread is a difficult industry with minimal returns. If an opportunity comes along they are bound to look at it."

The problems of the bakery division were amply demonstrated last week, when The Grocer reported that the retail price of a loaf of Kingsmill was actually falling - at the same time as rival brands appeared to be pushing through price rises. Further detailed analysis from The Grocer 33 shows that in the past 12 weeks, Tesco cut the price of Kingsmill as low as 70p, with Asda and then, belatedly Sainsbury's and Morrisons, following suit. Throughout this period the price of Kingsmill has consistently underindexed versus arch-rivals Warburtons and Premier-owned Hovis, though not without hitting sales of Hovis.

Analysts point out that ABF has been moving towards an ingredients and clothing business for some time. Bread, once the dominant product of the group, now accounts for just 5% of ABF's sprawling empire, which includes British Sugar, Twinings tea and the fast-growing discount fashion retailer Primark.

And there is speculation that if ABF manages to offload the ailing bread business, it will use the cash to further invest in Primark, with a full-scale assault on the European fashion scene a real possibility.

Primark is now second only to M&S in terms of sales volume, and accounts for a third of ABF's earnings. This month ABF announced plans to expand Primark into Spain after a successful year-long trial. The move puts it head-to-head with Europe's largest fashion retailer Inditex, the Spanish retail giant that owns the Zara brand. And retail analyst Mike Dennis at Piper Jaffray reckons: "If Primark is taking on a retailer as powerful as Zara on its own turf, it would be fair to assume they have big plans for elsewhere in Europe."n


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