A new British retail giant for fashion footwear and clothing should see the light in the United Kingdom over the next weeks, following an agreement in principle for a merger between Mosaic and Rubicon Retail that values the newly formed retail group at about £353 million (€512m-$655m), including £100 million worth of debt. The transaction, which is to be financed through a combination of cash and shares, is meant to speed up the growth of the group by increasing opportunities for cross-selling of clothes and footwear, and by beefing up the international business.

To be concluded over the next three months, the merger would form one of the largest UK-based fashion retail groups, with 1,700 stores and 13,000 employees in 27 countries. Don McCarthy, who set up Shoe Studio Group in 1991 and continues to run it as its chief executive, would retain a 55 percent stake in the new company.

Rubicon Retail comprises the Shoe Studio Group and two fashion chains, Warehouse and Principles, that it acquired in 2004 for £140 million (€202m-$260m). Shoe Studio Group operates some prominent banners such as Pied à Terre, Bertie, Roland Cartier and Chelsea Cobbler, along with licenses for Nine West, Kenneth Cole and Easy Spirit – altogether representing more than 260 footwear outlets.

The company recently inaugurated its first multi-brand concept store for shoes at Gatwick Airport under the name The Shoe Studio, offering portions of the lines sold in its single-brand stores as well as labels such as Diesel and Lacoste. Rubicon Retail reported sales of £408.5 million (€592m-$758m) for the year ended on Jan 31, 2006, almost the same as Mosaic’s sales, bringing their joint turnover to £818.5 million (€1,186m-$1,518m), with pro forma operating income before amortization and depreciation (EBITDA) of £105.9 million (€153.5m-$196.4m).

Mosaic consists of four fashion retailers - Oasis, Karen Millen, Coast and Whistles - which have been carrying widening ranges of footwear over the last years. All of them have sizeable store networks in the UK as well as in the Middle East, but Karen Millen is the banner that is most widely spread, with locations from Scandinavia to Spain, as well as Australia and the USA.

Earlier this year Rubicon was thought to be mulling an introduction on the Icelandic stock exchange, where Mosaic is already listed. Rubicon and Mosaic have many things in common, which probably facilitated the talks between them: Baugur, an Icelandic company with multiple interests in British retailing, owns 36 percent of Mosaic and 15 percent of Rubicon Retail. Kaupthing Bank, the bank behind Baugur, holds stakes in both companies as well. Baugur’s appetite for British retail properties is well-known, but Tom Hunter has reportedly denied that he has been approached by the Icelandic investor to sell his own Office chain.

The enlarged company will be led by Derek Lovelock, chief executive of Mosaic, while Don McCarthy will stay on as an adviser. His name has been making the rounds in connection with a leading executive position at House of Fraser, the British department store, which is reportedly being eyed by Baugur.

The intended merger fits neatly with the strategies of both companies to add footwear ranges to their fashion stores. This concept was one of the leading motives behind McCarthy’s acquisition of Principles and Warehouse. Before the merger with Mosaic he announced that he would be introducing footwear in about 200 Principles concessions before the end of the year as well as in department stores like Debenhams, John Lewis and House of Fraser.

The experience in logistics and other domains that Mosaic has acquired in Europe, the Middle East and the Far East could further benefit the enlarged group as Rubicon prepares to open up more stores in these regions. Rubicon already has 26 stores in Scandinavia and the Middle East, and it recently signed some more agreements to open stores in Malaysia and Dubai. The objective was to have 50 international outlets by next year and 100 international locations in five years’ time.

The combined group is going to be called Mosaic Fashions and it should retain its listing on the Icelandic stock exchange. The merger is still subject to approval by shareholders, banks and regulatory bodies.