By  on August 28, 2007

LONDON — Less than 20 years ago, the Icelandic company that now calls itself Baugur Group was a single food store that revolutionized the island's retailing with its discount pricing policy. Today, it's a major player on the British retail and fashion scenes and increasingly has its sights set on the U.S. Last month the group snapped up an 8.1 percent stake in Saks Fifth Avenue, making it the department store retailer's second-largest shareholder.

With stakes in brands including PPQ, All Saints and the department store chain House of Fraser, Baugur, which also has its fingers in Northern European property, media and supermarket companies, last month made its first move in the U.S., taking an 8.1 percent stake in Saks Fifth Avenue and becoming its second-largest investor.

So what's next for a company that few outside Northern Europe have even heard of?

Baugur is something of an anomaly in the investment community: It's private, family owned and willing to take minority stakes in companies and work alongside their existing management teams for the long haul. It doesn't aim to bail out of investments in the medium term.

"We're a retail-focused investor looking to build brands with potential," said Gunnar Sigurdsson, Baugur's chief executive, in a telephone interview from Reykjavik, Iceland. "We're not passive investors, and when we take a stake in a company, we're not looking for the door. We take a long-term view."

Richard Hyman of Verdict Research, the London-based retail consultancy, said: "Baugur behaves like a private equity house, but it operates on a different time scale. It's also been very astute in the timing of its investments, and has taken full advantage of the bull market."

Baugur currently has majority, minority and 50 percent stakes in more than 20 retail-based companies of varying profiles and sizes worldwide. Its portfolio includes 3,900 stores in 35 countries. Sigurdsson declined to provide any figures for Baugur's annual turnover, but said sales of all the companies in the Baugur portfolio are 10 billion pounds, or $20 billion at current exchange.

The Icelandic company first broke into the U.K. retail market in 2003 with the purchase of Hamleys, the toy store with a flagship on Regent Street, and Oasis, the high street fashion chain. Today, its U.K. retail investments continue to be in the middle to upper end of the market, and include Goldsmiths, the high street jeweler; Mappin & Webb, the luxury watch and fine jewelry retailer; Mosaic Fashions, the group that owns high street chains Karen Millen, Whistles and Coast, and House of Fraser, the department store. On Monday, one of Baugur's investments, the designer Matthew Williamson, revealed a new investor, Marvin Traub's TSM Capital, with Baugur remaining a shareholder.Sigurdsson said the company tends to look at investments where the transaction value is "at least $500 million," and will often work with the same business partners, including Scottish multimillionaire Sir Tom Hunter; Kevin Stanford, co-founder of the midmarket fashion chain Karen Millen, and Don McCarthy, the founder of Shoe Studio Group, which operates the footwear departments in several major U.K. department stores and holds the U.K. shoe licenses for Nine West and Kenneth Cole. McCarthy is currently executive chairman of House of Fraser.

The bulk of Baugur's deals are typically leveraged buyouts, although Sigurdsson said new acquisitions are not loaded with debt. "Our goal is to invest in growth and explore new opportunities, so we want these companies to have ample cash," he said.

Although the bulk of Baugur's investments so far have been above that $500 million mark, the company is increasingly interested in smaller companies. To wit, it has stakes in the U.K. fashion chain All Saints and the Danish label Day Birger et Mikkelsen, which has its own stand-alone stores and wholesales at specialty stores including Liberty in the U.K.

Baugur has also recently formed a venture business unit, which over the past year has purchased the minority stake in Matthew Williamson and 50 percent stakes in London label PPQ and Steinunn, an Icelandic ready-to-wear brand that launched earlier this month at Takashimaya in New York.

With regard to the smaller companies, Sigurdsson said: "We're not looking to build businesses from scratch or turn struggling ones around. We're looking at interesting brands that already have a sales base, a good infrastructure and a reasonably developed wholesale business. We help them take the next step."

Sigurdsson said Baugur likes to work alongside existing management teams. "It's rare for us to completely change a team, and we like management to be our co-investors in a business, to put their own cash on the line," he said.

Sometimes, Baugur will not only retain an existing management team, it will set that team new challenges. In 2003, Baugur purchased Oasis, the high street fashion retailer. Over the next few years, Baugur also purchased fashion retailers Karen Millen, Whistles and Shoe Studio — and handed over management to the original Oasis bosses. "We felt they were strong enough to take on these other companies, and we now view Mosaic Fashions [parent company of those fashion retailers] as a successful project," he said.Baugur does not see itself as a group — like LVMH Moët Hennessy Louis Vuitton or Gucci Group — but rather as an association of companies, Sigurdsson explained. Those companies can tap into back office synergies, an international sourcing network that includes commercial real estate agents, advertising agencies and IT suppliers, and Baugur's industry expertise. "All of our holdings are individual companies with their own management teams. Baugur is helping add value," he said.

Amy Molyneaux, who co-founded PPQ with Percy Parker, said working with Baugur has been a dream. "From the very beginning, the Baugur people knew what we were talking about. They have a retail history, they understand our problems, and they didn't need educating about fashion," she said. "They are not your typical investors, because they have the money, they know about the fashion business, but they don't interfere with the creative side."

Since Baugur took a 50 percent stake in PPQ last year, the fashion label has been able to open a shop in the former Gibo space on London's Conduit Street. PPQ has taken over the entire building, which spans 17,000 square feet, with the shop on the ground floor and offices upstairs. Parker said that with Baugur's support, PPQ has also been able to offer midseason collections; grow its jewelry range; add shoes and bags for fall, and create an online sales site, which will go live in the fall.

Joseph Velosa, chief executive and co-founder of Matthew Williamson, said he and Williamson looked at a variety of potential investors before joining forces with Baugur. "They have a very proactive, very go-getting business culture. They are quick and decisive, but they're also hands-off. I talk to them about once every two months," said Velosa, adding Baugur has its quirks, too. "They never, ever sign a deal on a Monday, because it's bad luck in Iceland."

Matthew Williamson will open its second stand-alone store in the Upper East Side of Manhattan in the second quarter of 2008, and its third unit, in Los Angeles, at the end of 2008. The company is also setting up a stand-alone accessories business, which will be up and running early next year.PPQ and Matthew Williamson also said the corporate culture at Baugur is an interesting one. Each year, the company invites the companies' management teams on a weekend retreat in a different location. Last year it was Copenhagen, where Bill Clinton was the guest speaker. This year it was Monte Carlo, where Tina Turner entertained the troops. "It's so interesting for us, as a small company, to go to these weekends and hear what the head of House of Fraser has to say, for example. Ordinarily, we'd never be privy to that kind of information," said Molyneaux.

Sigurdsson said he believes Baugur's strength lies in the fact that it's family-run and therefore flexible and fast-moving. The seeds of Baugur were planted in 1989 in Iceland by the dashing, 39-year-old Jon Asgeir Johannesson, now executive chairman of Baugur, and his father, Johannes Jonsson. Their first company was a discount supermarket called Bonus, which rapidly grew into a nationwide retailer. In 1998, Bonus merged with Hagkaup, another retailer, to form Baugur.

In 2001, Baugur tested the U.S. market with the purchase of Bill's Dollar Stores, which were rebranded as Bonus Stores. The investment was a flop, and Baugur didn't reenter America until earlier this year with its investment in Saks Fifth Avenue. After its American failure, Baugur began turning its attentions to the U.K. In 2001, Baugur took a stake in Arcadia, which it sold to retail tycoon Philip Green for an estimated $140 million a year later. In 2003, it made its big splash in Britain with the purchase of Hamleys and Oasis, and the momentum since then only has grown.

There is much chatter in London as to where, exactly, Baugur is getting its seemingly endless reserves of money, and how it has been able to grow to such dimensions in less than 20 years. Iceland, after all, is a tiny country: The entire population is 302,000, or roughly the size of Tampa, Fla. Until recently, the nation's chief industry was cod fishing. It is only recently, with Johannesson's thirtysomething generation, that investors have been seeking opportunities outside the island's borders.

Sigurdsson said Baugur's money comes from within. "We have quite a big war chest, and good access to capital," he said, adding funds often come from sales, profitable investments or moves such as refinancing. Earlier this year, Baugur refinanced two British companies — Jane Norman, a chain selling midmarket fashion, and the Iceland frozen food chain — to the tune of $800 million. He said that money went straight back to Baugur and to the management teams with stakes in those companies.The U.S. is moving once again onto Baugur's radar. "We've been looking at the market for a while, and think there is a great opportunity to invest in retail and property," said Sigurdsson, who declined to be more specific.

He said Baugur took the Saks stake — for which it paid about $250 million — because, "It's an interesting company and brand, and because the share value was good. We're pleased to have taken the stake, but we have no other plans with regard to Saks."

He declined to comment on whether Baugur would use its Saks stake to ease its women's fashion brands — Oasis, Whistles, Karen Millen and PPQ — into the American market.

In the U.S., Baugur is most interested in "retail in the big cities," and would like to work with companies similar to the ones it owns in the U.K., Sigurdsson said. "I do think there is a niche in the U.S. market for a family-owned, private company with a retail background," he said. "I think if we show we are able to add value to our investments in the U.S., there will be a big space for us."

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