Variety store group Woolworths is likely to stretch its banking covenants to the limit and fail to pay a dividend for the next two years, an analyst has warned after a company visit.

Seymour Pierce analyst Freddie George was sceptical about the chances of a takeover of Woolworths by Iceland founder Malcolm Walker’s Baugur-backed consortium. He feared that the retailer would continue to lose sales to e-tailers and grocers.

George said: “Woolworths could come close to breaching its covenants, with the company expected to report trading losses over the next two years.

“On our computations, estimated average debt of£208 million forecast over 2008/09 equates to 3.5 times EBITDA. We have thus assumed the company does not pay a dividend in this period.”

A fortnight ago, Woolworths named Steve Johnson its new chief executive. George said Johnson faces “a major challenge” and is likely to renegotiate supplier terms, crack down on capital expenditure and renegotiate pension agreements.

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