Ask anyone in the City what they think is going on at Somerfield and you get one answer: "It's up for sale."

As a venture-backed business this is no surprise, but sources close to Somerfield have suggested a break up has become a strong possibility. The company has been struggling with availability, tumbling profits and declining market share. It made a pre-tax loss of £617.8m in the year to April 2006 compared with a £60.9m profit the year before.

Sales are expected to be £1.2bn lower in the year to April 2007 as Somerfield has rationalised its portfolio with the sale of 371 stores and a more upmarket approach, thought to improve its channels of decent returns.

But Competition Commission issues aside, Tesco, M&S, Sainsbury's et al are expected to be interested in buying pieces of the business.

Somerfield maintains, however, that it is not for sale and it confirmed to The Grocer this week that it has been in discussions with a number of banks about refinancing its debt. But exactly where would this leave the chains?

Somerfield was bought by the Apax Partners-led consortium, Violet Acquisitions, in December 2005 for £1.8bn, and last year underwent a £850m property-backed bond sale that enabled its shareholders to see a decent (but unspecified) return on their investment. The board also sanctioned a bonus pot of more than £10m for management and staff. And, despite its trials and tribulations, Somerfield's management remains upbeat and has briefed suppliers and store managers on its recovery plan to drive sales through lower prices, simplified ranges and improved availability.

Last month chief executive Paul Mason confirmed EBITDA was up 50% year-on-year. Refinancing its debt could help improve that or allow shareholders to take further cash out. "Banks have put forward proposals for refinancing and the company has not made its mind up," a company spokesman confirms, though he would not go into any detail.

It's not a bad move, says Teather & Greenwood analyst Greg Lawless. "Somerfield has been growing EBITDA. That's all the banks are interested in," he says. "It makes sense to go to the banks and get a lower interest rate. Baugur did it with Booker and Iceland."

Others are less convinced it is the solution. "Somerfield has shown quite a lot of volatility," points out one. "It's had a lot of restructuring and will want a more consistent track record of sales and profit growth before it can be sold. It has to show it can make money."

Refinancing sounds "like desperation" adds Christopher Gower, retail analyst at Man Securities. He thinks it is simply exploring every avenue before admitting defeat.

"It has got to look at refinancing, but I would be surprised if it is the final act," he says. "We believe Somerfield is a car crash waiting to happen. When you have this refinancing, what follows is a split anyway.

"It is looking like the name will eventually disappear - it will be broken up and sold to the others.Sainsbury's CEO Justin King is gearing himself up to take some stores. And it's not just the stores, it's the land as well."

The multiples are already circling, particularly over its forecourt business and some of its smaller high street stores. The conundrum for the consortium is how to maximise its return.

"Asda and Morrisons would be interested in the whole lot if the alternative were to get nothing, but Somerfield would get full value if it were broken up," says Alaister Johnston, analyst at JP Morgan.

Although Somerfield has only been in private hands for 18 months, it is not too early for the owners to get out, according to one analyst. "The backers have made their money, now it's how and when they sell it," he says bluntly.

Passing it on to another private equity firm would be the simplest solution as that doesn't create any problems with the Competition Commission.

But Lawless thinks a quick sale unlikely. "It is an obvious target, but not within the next 18 months because of the inquiry," he says. "I can see Sainsbury's and Asda having a good look, but you are going to have to dunk pretty deep in the barrel to get any apples.

"Some of its stores are very old and if you could shut them you would. You can't rule out non-trade. It's privately owned today so it is possible another deal could be done. Private equity is flush with money at the moment but it would take a brave person to buy it."n

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