Woolworths, the high street legend that has been facing testing times, said it had snubbed a takeover proposal for its 815-store retail division from the man who founded the Iceland frozen food chain.

Woolworths, the high street legend that has been facing testing times, said it had snubbed a takeover proposal for its 815-store retail division from the man who founded the Iceland frozen food chain, saying the bid undervalued the operation.

The sweets-to-DVDs retailer said it rejected the approach from a group led by Malcolm Walker, who started his career as a trainee at Woolworths, on the grounds it involved a complex restructuring "not achievable in practical terms" and undervalued the company's assets.

"It also required the company to retain all the pension liabilities for current and former employees of the retail business, which is unacceptable to the board," Woolworths said in a statement.

The announcement followed a report that Walker had made a formal approach for the chain's 815 outlets. Walker was reportedly acting with a consortium which includes Baugur, the Icelandic investment group whichn holds 10% of the beleaguered retailer and has worked on deals with Ayrshire retail entrepreneur Sir Tom Hunter.

The consortium is interested only in Woolworths' stores, and not EUK, Woolworths Group's entertainment wholesale division, or 2 Entertain, its music and video publish-ing joint venture with the BBC.

Woolworths, which last week named former Focus DIY boss Steve Johnson as its new chief executive following a profit warning last month, said pre-liminary conclusions of a review into the group's business confirmed that there was a considerable opportunity to build a sustainable value retail proposition based primarily on its small to medium-sized stores.

However, the retail business has been battered by competition from supermarkets and internet retailers. The group saw like-for-like sales fall 6.7% in the six weeks to July 26, with margins under pressure because a greater proportion of trade came from CDs and DVDs, rather than higher-margin outdoor products and clothing.

Under the proposed deal, Walker would run the chain as a going concern. However, he wants the Woolworths board to agree to retain most of the group's debt and wipe out its pension deficit.

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

Walker started working at Woolworths in the mid-1960s as a management trainee. He eventually set up the first Iceland shop in Oswestry, Shropshire, in 1970 and saw it become a national operation.