LONDON (Reuters) - Private equity firms are circling UK mutual The Co-operative Group, hoping the food-to-funerals group will be forced into selling off parts of its business as it battles to contain a scandal engulfing its banking arm.
The Co-op's chairman, Len Wardle, resigned on Tuesday after the ex-chairman of its bank, Paul Flowers, a Methodist minister with little banking experience was caught on camera allegedly arranging to buy cocaine and crystal meth.
Buyout houses are interested in the Co-op's funeralcare business, three sources with knowledge of the matter said, attracted to its stable cash flows and strong position in a market they have already invested in.
Among the groups which have looked at it is Formula 1 owner CVC, a fourth source with knowledge of the matter said.
The Co-op has not ruled out selling more businesses and private equity is keeping close tabs on whether its problems - which led the mutual to give up control of its bank to hedge funds following huge losses - will force it to break up.
The Co-op said earlier this month it was scrapping dividend payments to 7.6 million members to help pay for a 1.5 billion pound rescue of its banking division, underlining the financial challenges facing the group.
"It's a well publicized situation and sponsors are taking a close interest in what might happen, what might come up," said a banker who advises private equity firms, speaking on the condition of anonymity.
However, another banking source said that while a number of buyout houses are also eyeing its foods business, the Co-op's size and ownership structure would make any full break-up of the UK's largest mutual difficult and unlikely.
A previous attempt to buy the Co-op - by financier Andrew Regan in 1997 - led the group to strengthen its articles of association so members would not be incentivised to vote for a sale to non-mutual suitors.
Private equity managers buy companies, try to shake them up and then sell them on at a profit within 5 to 7 years, and their interest in the mutual is likely to be controversial among the Co-op's ethically-minded members.
Under the Co-op's ownership structure it is owned by individual members and 80 independent co-operative societies, who would have a vote in the case of break up.
The Co-op has already sold its life insurance and savings business this year, raising 220 million pounds, and it expects to sell its general insurance arm in 2014. New chief executive Euan Sutherland is conducting a review of the group and this could lead to more businesses being sold.
"We have to take a long hard look at our businesses and be honest about their performance," he said earlier this month.
The Co-op's funerals business is the most obvious candidate for a sale as it is considered less core than the food and pharmacy divisions of the Manchester-based group, which traces its roots back 170 years to the Rochdale Pioneers.
Private equity also has a long record in funeral services. Montagu Private Equity bought Dignity Funeral Services in 2002 before listing it on the stock exchange two years later.
Competition concerns are likely to limit interest for its foods division from bigger rivals such as Morrisons and Tesco.
Industry data this week showed the Co-op was the worst performer among the largest grocers in the last 12 weeks, with its sales down 0.4 percent compared with the same period last year.
CVC declined to comment. The Co-op did not respond to requests for comment.
Reporting by Steve Slater, Kylie MacLellan and Matthew Scuffham; Editing by Ron Askew