Supermarket chains looking to buy Iceland will be unable to convert “at least 200” of the frozen discounter’s stores into small-format supermarkets without costly and time-consuming changes in the leases, The Grocer understands.

A restrictive user clause negotiated with landlords on “the first 100-odd leases” specified that items sold “must be appropriate to a freezer centre”, said a real estate source.

With the restrictive user clause also applying to “a good chunk” of the leases on the 273 stores acquired with the Bejam takeover in 1989, the source estimated that “at least 200 stores” would be affected and “up to half”.

“Restrictive usage was one of the dichotomies of the time, particularly on precincts, where landlords and councils wanted a mix of traders,” the source explained. As Iceland grew in scale following its flotation in 1984, founder Malcolm Walker was able to negotiate leases on wider usage terms, he added.
While a change in the leases could be negotiated, it would be “a nuisance and a cost”, said the source, testing the resolve of supermarkets like Morrisons that are understood to be considering a bid.

After Friday’s results, which saw net pre-tax profits rise 15% to £156m in the year to 25 March, newspaper reports suggested that the price tag for Iceland was likely to rise further, as it offers supermarket giants a last chance to expand their empires. Some newspaper estimates put the price tag as top £2bn. Last week, long-term Asda advisers Lazard were reportedly instructed to put together a formal bid for Iceland. Asda acquired Netto’s 193 stores in a £778m deal last year, but it was forced to sell or sub-let 47 after an OFT inquiry.

With disposals similarly expected for any chain successfully acquiring Iceland, however, the restrictive leases may prove a further disincentive and may actually lower the price of any supermarket bid as the appeal of Iceland as an acquisition target was thought to lie in its leases having A1 usage.
Richard Price, senior surveyor in retail warehousing at global real estate services firm DTZ, said it was inconceivable that Morrisons or Asda would want to stick to the frozen food format.

“Morrisons has trialled smaller space in a few Somerfields, so acquiring Iceland could work well for them. However, the frozen format doesn’t fit well with how Morrisons would like to portray itself” with its fresh, market-street focus, Price added.

The user restrictions may even pave the way for Walker to negotiate a deal with Landsbanki with a free hand, a City source suggested. The disclosure of restricted use leases was “dynamite” and “could well be a dealbreaker when it comes to due diligence”.

Walker tabled a £1bn-valuation bid last October to buy out Landsbanki’s 67% stake, and retains the option of securing the frozen chain so long as he matches the highest bid. Walker and his management team own a 26% stake. The remaining 7% is held by Glitnir, another failed Icelandic bank.
Landsbanki is expected to begin negotiations on the sale of its stake in Iceland later this summer. A resolution committee last month appointed UBS and Bank of America Merrill Lynch to advise it on options and had concluded that with “market conditions currently favourable, it is advisable to commence the sale process”.

Walker was unavailable for comment on the lease situation but, on announcing record results on Friday, promised “a strong, prosperous and independent future for years to come,” and said he had secured bank financing for an offer.

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