According to reports, the plan by the Icelandic investment group, which is the retailer’s second-biggest shareholder, was to break up the group and acquire its stores.
This would see the retail stores split from the group's wholesale and DVD publishing divisions.
A spokesperson for Woolworths said: "The board confirms that it did receive an indicative proposal and that it has been rejected. The offer undervalued the retail assets, the cashflow and the potential profits of the business."
Woolworths shares closed up on Friday at 6.65p a share, valuing the group at £100m. The retail division has been the weakest part of Woolworths and is loss-making at an underlying level.
Richard North, who started as Woolworths chairman last year, has not been averse to a demerger of the group. However, the conditions attached to the proposal mean the remaining divisions may struggle to refinance the debt and would be likely to keep contingent liabilities on the store estate, much of which has onerous leases.
If Baugur is successful with the bid it is likely to rebrand some stores under the Iceland banner.
There have been informal discussions in the intervening period but no one has been able to find a formula acceptable to the Woolworths board for acquiring or demerging the group.
Source: Financial Times