Chaos on the High Street

IT looked like a masterstroke. Philip Green, the Bhs billionaire and legendary dealmaker, had slapped in a takeover bid for Top Shop-to-Burton group Arcadia, forcing its directors on to the back foot.

But as chief executive Stuart Rose and his colleagues at Arcadia gathered in their Oxford Street boardroom in London last Thursday to mull over Green's latest offer, the bombshell dropped.

Baugur, the Icelandic group that owns 20% of Arcadia and which was working with Green to break up the fashion group, had been raided in a fraud investigation.

The revelation that Baugur had been targeted by the Reykjavik economic crimes unit immediately let Arcadia off the hook. Rose declared that no response could be made to Green's £770m offer until Baugur's legal problems were resolved.

Green was incandescent. His carefully pitched 408p-a-share bid, which promised to make him master of the High Street, had been thrown into chaos. And as he flew for a weekend in the Monaco sunshine, he was clearly preparing to ditch his tainted Icelandic partners and pursue Arcadia alone.

Such was his anger that he decided not to meet Jon Johannesson, chief executive of Baugur, who had flown to London for crisis meetings with Green's financial advisers at investment bank

Merrill Lynch. Given Green's notoriously aggressive manner and colourful language, the Icelander probably got off lightly.

But despite his fury, Green hints that to go ahead, he does not need Baugur. 'Financing is not an issue for me in this at all,' he said. 'I have all the money I could need.'

This is typical of his brashness, but the facts speak for themselves. This year he paid himself £165 million in dividends from Bhs and famously spent £5 million taking 200 guests to Cyprus for his 50th birthday party.

Green gained his immense wealth by acquiring Bhs two years ago for just £200 million. Ruthless costcutting and tough negotiations with suppliers raised profits to almost £100 million, supposedly boosting the value of Bhs, of which he owns 95%, to more than £1 billion.

He is said to have already suggested to Baugur that he save its embarrassment by simply buying out its stake in Arcadia.

Baugur tried to buy Arcadia a year ago and was firmly rebuffed. But the Icelanders held on to their stake. Green planned to buy Arcadia with Baugur's backing and then exchange the key Top Shop, Top Man and Miss Selfridge stores. Baugur runs Top Shop in Iceland under licence and was keen to take control of the whole chain.

Johannesson's arrival in London, and his company's robust rebuttal of fraud claims, suggest that Baugur is determined to salvage the deal. It has filed a complaint in court in Reykjavik claiming that the police search of its offices was unlawful and in breach of the European Convention on Human Rights.

The raid followed allegations by

Jon Sullenberger, an Icelandic citizen but owner of a Miami-based wholesale company, of fraud against Baugur chairman Tryggvi Jonsson and Johannesson.

Sullenberger, whose company had been supplying Baugur but whose contract was being reduced, alleged that false invoices in the name of Baugur were used to funnel money out of the company to pay for a pleasure cruiser in Miami. The largest invoice was allegedly for $589,890 (£383,000).

The vessel was jointly owned by Sullenberger, Jonsson and Johannesson and was appropriately named The Viking.

Baugur has flatly denied the allegations and emphasises that no charges have been made against its executives.

Whatever happens to Baugur, Green's prize remains domination of the High Street.

Arcadia owns a raft of top names including Burton, Evans, Wallis, Top Shop and Miss Selfridge, as well as 50% of the online shopping business, zoom.com.

At Bhs, Green boosted profit margins to nearly 12% in just a year. Rose, a friend of Green's, expected Arcadia's margins this year to be about five to six%.

This is a huge improvement for Arcadia, but there would be plenty more to be made for Green if he could repeat his Bhs trick.

While Top Shop and Miss Selfridge are the successful names in the Arcadia portfolio, this reduces their potential for further growth, which is why Green would be happier to see Baugur take them over.

The story doing the rounds in the City is that Green bid for Arcadia after his daughter Chloe asked if he would buy Top Shop - but he has no intention of keeping the brand.

When Rose took the helm at Arcadia two years ago, the share price stood at a meagre 50p. Investors have already seen huge gains and were widely expected to take Green's money and run.

Despite the Baugur setback, Green remained bullish. 'If they felt it wasn't enough they'd tell me to go away,' he said. 'They haven't and I think that's as good a steer as you can get about what they want.'

And if Baugur is forced out? 'If it turns out to be a different deal, then I have to consider whether it's a deal I want.'

But those who know Green say that if Baugur is knocked out of the contest, the Bhs boss will be unable to resist going the distance.