According to today's Financial Times, Baugur, which already has a 10 per cent stake in Woolworths, is devising a plan that would see the Icelandic raiders dramatically cut the size of the business and pass on a number of the chain's 800 stores to a large supermarket chain.
Baugur is said to be preparing to move in on the company, which has faced intense competition from supermarkets and online retailers, compromising its market position.
Woolworths - which is led by chief executive Trevor Bish-Jones, who joined the company in 2002 - had no comment to make.
Baugur is understood to have calculated that part of the sum needed to stage a takeover of the£500 million company could come from separating Woolworths' two entertainment businesses - EUK wholesale entertainment distribution and 2 entertain, the group's 40 per cent-owned joint venture with BBC Worldwide - which it values at more than£350 million combined.
In a trading update in July, the variety retailer revealed a 7.7 per cent fall in like-for-like sales and a 3.1 per cent fall in total group sales for the 25 weeks to July 22.
Bish-Jones said at the time: 'This performance shows that, for us, the retail environment remains challenging. Against that backdrop, we continue to improve the business by investing in the store base, rapidly enhancing our multichannel capability and driving efficiencies through our supply chain.'