UPDATE 3-Woolworths in talks to sell stores for nominal sum

LONDON, Nov 19 (Reuters) - Struggling sweets-to-CDs retailer Woolworths is in talks to sell its high-street business for a nominal sum, illustrating the pain being felt by British store groups as they grapple with the economic downturn.

An industry source said on Wednesday that the 99-year-old group, one of Britain's best known store chains, was in talks with company restructuring specialist Hilco.

Woolworths, which runs about 800 shops and also has a DVD publishing and a distribution business, declined to comment beyond confirming it was in talks about a possible offer from an unnamed party. Hilco was not immediately available for comment.

Earlier, the Times newspaper said Woolworths was considering selling its retail business to Hilco for just 1 pound. It reported that Hilco was reluctant to take the group's pension liability, with talks focusing on the level of debt to be assumed.

At 1052 GMT, Woolworths shares were down 1.23 pence, or 32 percent at 2.7 pence, valuing the group at about 38 million pounds.

In another sign of the extent of the consumer downturn British retailers Marks & Spencer and Debenhams are both holding pre-Christmas sales this week.

In August, Woolworths rejected a bid approach of about 50 million pounds ($75 million) for its retail business from a consortium led by Icelandic investor Baugur and retail entrepreneur Malcolm Walker.

Analysts at Numis said the Hilco scenario looked similar to the Baugur/Walker approach, but for 1 pound not 50 million.

'The renewed newsflow confirms that Woolworths' retail arm -- inclusive of its obligations -- is viewed as a net liability,' they told clients in a note.

Numis said that with the non-retail division having projected operating profit of about 70 million pounds, a group pension charge of 17 million pounds, overheads of 8 million pounds and an interest charge of about 30 million pounds, 'the clean sale of the retail arm for 1 pound leaves precious little for shareholders.'

John Stevenson analyst at KBC Peel Hunt said in a note he was doubtful a successful deal could be concluded.

Woolworths, which demerged from Kingfisher in 2001, has been struggling for years in the face of growing competition from supermarkets, online retailers and specialist players.

Its problems have been exacerbated in recent months by a rapid downturn in consumer spending, which has forced a string of retailers, including furniture retailers MFI and ScS Upholstery, into administration, a form of creditor protection.

Woolworths posted a record first-half underlying pretax loss of 90.8 million pounds in September on turnover of 1.11 billion pounds and scrapped its dividend.

Bank of Ireland division Burdale Financial and GMAC Commercial Finance will be key players in any Woolworths sale. Together they lent Woolworths 385 million pounds in January. The pair appointed Deloitte to represent them in talks with Woolworths last month.

Woolworths' largest shareholder is Iranian property magnate Ardeshir Naghshineh with just over 10 percent.

He was quoted in last Friday's Retail Week as saying the group was worth 342 million pounds.

He told the magazine 'The share price is indicating that the UK retail operation is worth nothing, which is rubbish.'

Baugur, the troubled Icelandic investor, holds 10 percent.

In September Woolworths appointed former Focus DIY chief executive Steve Johnson as its new CEO.

Johnson, who was due to detail the results of his strategic review in January, said in September: 'I'm absolutely convinced that Woolworths Retail can be a sustainably profitable business.'

(Reporting by Mark Potter, James Davey and Dan Lalor; Editing by Chris Wickham) ($1=.6645 Pound) Keywords: WOOLWORTHS/

(mark.r.potter@thomsonreuters.com; +44 20 7542-2943; Reuters Messaging: mark.potter.reuters.com@reuters.net)