By Mark Potter and James Davey
LONDON, Feb 5 (Reuters) - Untangling a string of retailers from the collapse of Icelandic group Baugur will take time and, while some could emerge unscathed and bidders are circling others, the process will likely involve some bloodletting.
Most of Baugur's investments are minority holdings and analysts think that, with the continued support of their banks, some of the companies involved could be little affected.
They also think that, if necessary, there will be plenty of interest in Baugur's stakes in fast-growing frozen foods chain Iceland, department stores group House of Fraser and some of its fashion brands, such as Karen Millen and Principles.
Private equity firms and Monaco-based fashion billionaire Philip Green are tipped as the most likely buyers.
Bidders for some of Baugur's other assets, like its stake in jewellery group Aurum, may be harder to find in a consumer downturn, which has hammered demand for luxury goods.
Baugur holds, either directly or via a joint venture, 13.5 percent of British department stores group Debenhams and 17.6 percent of fashion retailer French Connection.
"Clearly there will be uncertainty in the short term about all of the associated retail names and there can be no doubt that some of the businesses will be adversely affected and potentially be consolidated by other acquirers," said Singer analyst Matthew McEachran.
Baugur, once the byword for Iceland's aggressive expansion onto the global financial stage, said on Wednesday it had applied for court protection from creditors after restructuring talks with lenders failed.
This was in response to the decision by its main lender nationalised Icelandic bank Landsbanki, to apply to put Baugur's UK arm into administration.
The first uncertainty to sort out is the control of Baugur's assets, which span companies employing about 50,000 people and generating turnover of about 5.4 billion pounds ($7.8 billion).
An Icelandic court will rule on Friday on Baugur's request for at least three weeks' protection from its creditors, while a British court is expected to decide in the coming days whether its UK business can be put into administration.
Even if Baugur secures a delay, analysts think the assets will eventually fall into the hands of its creditors.
The question then is whether creditors would look to sell the assets quickly or hold on in the hope of a better price.
"If this is handled properly it will not have an effect on the operations of the businesses themselves," said Nick Hood, partner at insolvency experts Begbies Traynor.
He believes the vast majority of the stakes will find their way into safe hands.
"My worry is what happens if some of these stakes don't find a buyer," he said.
"Then you are left with Landsbanki holding them and Landsbanki is effectively the government of Iceland and the government of Iceland is for all practical purposes now controlled by the International Monetary Fund," he said.
"That could make things worse because it's difficult to run a business in terms of strategic decision making and any serious restructuring ... if there's a 30 percent shareholding out there and you can't predict its behaviour."
Landsbanki has said it wants to avoid a fire sale and analysts think that, provided the banks remain supportive, many of Baugur's investments could be unaffected.
"If the holding company is put into administration, the typically minority nature of the holdings, coupled with potential ongoing financing support depending on the banks, means that any specific individual retailer might not come unstuck," said Singer's McEachran.
He also noted the precedent of administrators holding onto the 22 percent stake in British food wholesaler Booker, which was previously owned by Iceland's Kaupthing Capital Partners, presumably in the hope of securing a better price.
Private equity players have been licking their lips waiting for Baugur to fall.
"I found it very interesting that in the carnage pre-Christmas and over the Christmas period with all those retail failures, only a very small number of them found a private equity home," said Hood.
"There's a lot of powder being kept dry for Baugur," he said.
However, analysts think that not all of Baugur's investments will emerge unscathed.
They predict a partial shake-out and consolidation, particularly in women's fashion.
"Although we expect the material operating units to be sold successfully over the next year, we believe PricewaterhouseCoopers (which Landsbanki has nominated as administrator to Baugur's UK business) will be under pressure to close both unprofitable and own store and concession space," said Seymour Pierce analyst Freddie George.
A procession of British retailers have fallen into administration in recent weeks as shoppers have cut back spending amid rising unemployment, sliding house prices and fears of a deep recession.
Few have found bidders, with sweets-to-DVDs chain Woolworths closing 800-plus stores last month with the loss of 27,000 jobs. (Editing by Andrew Macdonald)