Guardian.co.uk

The struggling Woolworths retail group yesterday rejected a bid approach from Malcolm Walker, the multimillionaire founder of the Iceland frozen food chain.

The 800-strong variety store chain, it emerged, received a formal written offer from Walker about three weeks ago. It is said to value the stores at 'a few tens of millions'. Walker wants only the store chain and does not want control of EUK - the books and music distribution business - or 2entertain, the joint venture with the BBC that distributes DVDs of programmes such as Planet Earth and Top Gear. Woolworths has been battered by supermarkets and specialist online retailers in recent years and despite sales of £1.7bn has struggled to make a profit.

It is understood that Walker intends to turn over part of every Woolworths store to food and take on the big grocers and convenience store operators. Woolworths recently started a pilot project selling Somerfield food in some of its stores.

Walker's Iceland chain is backed by Icelandic investment group Baugur, which owns a 10% stake in Woolworths. The approach is from a consortium headed by Walker with the backing of Baugur.

Yesterday, as details of Walker's indicative proposal leaked out, Woolworths called an emergency board meeting and rejected the bid as 'unacceptable'.

In a statement, the Woolworths board said Walker's offer was too low and that he also wanted Woolworths to retain all pension liabilities for employees.

The store chain said the bid 'undervalued the assets' and 'involved a complex restructuring which in practical terms is not achievable'. It added that the group's funding arrangements could be 'adversely impacted' by the bid.

At its financial year end on February 2, Woolworths' net debt was £124m. According to Woolworths' annual report, it has a pension deficit of £48.2m, but this is due to be revalued.

Iceland refused to comment on the proposal yesterday but is expected to release a statement this morning. A source close to the consortium said he did not expect Walker to walk away.

The grocery tycoon - who was once a management trainee at Woolworths - has had a rollercoaster career in recent years.

After building the frozen food empire from a shop in Oswestry, he tried to move the downmarket Iceland chain into organics. The strategy backfired and Iceland's sales and share price fell off a cliff. Walker was ousted in the wake of some controversial share dealings. New management was installed but failed to return the business to health. In 2005 Baugur bought the chain and Walker made a comeback.

Since then the business has bounced back and as the credit crunch has taken hold discount and frozen food retailers have seen sales soar.

Woolworths, meanwhile, has lurched from bad to worse. The shares - which are likely to climb today - have collapsed by some 70% to 6.65p in the past year and the company now has a stockmarket valuation of £97m.

In July it admitted recent sales were down nearly 7% on 2007 levels.

Last week chairman Richard North named the former boss of DIY chain Focus as Woolworths new chief executive. Restructuring specialist Steve Johnson agreed to take on what is widely regarded as the toughest job in retail in return for a pay package that could generate more than £8m in four years if he can get the share price back over 20p.