Published on: October 2, 2003Global news and commentary from PlanetRetail.net…
Following the announcement of the Department of Trade and Industry’s verdict on the Safeway takeover battle - clearing Morrisons to proceed with its bid with the proviso that it should dispose of 53 of Safeway's 479 stores, and blocking Tesco, Wal-Mart’s Asda and Sainsbury’s - there has been a raft of speculation as to how the final stages of the saga might play themselves out.
Morrisons has responded by saying that it would start talks with the Office of Fair Trading over the deal. "Morrisons will now begin the process of discussing the necessary undertakings relating to the required store divestments with the Office of Fair Trading. This is likely to take several weeks," it noted in a statement.
Asda, Sainsbury’s and Tesco have all expressed varying degrees of disappointment, but have tempered this with expressions of resolves. Asda “will press on with our plans to grow the business and expand our store network”, Sainsbury’s is “encouraged that we have the chance to bid for some of the stores that Morrison's is required to divest”, while Tesco has “a strong strategy for growth in food, non-food, retail services and overseas which we look forward to continuing.”
Despite Morrison being cleared to proceed, Safeway shareholders still need persuading, with some feeling that Morrison’s $4.3 billion (US) all-share offer was not overly generous. That offer - once accepted by the Safeway board and recommended to its shareholders - has now expired and the Morrisons board will have to table a new one. It is thought that Safeway is pressing Morrison to add a cash sweetener to the deal.
If the two groups are unable to agree on the terms of a recommended offer, Morrisons has indicated that it cannot rule out launching a hostile bid for its larger rival. Safeway is arguing that the 53 stores Morrisons needs to sell should attract a premium price because of the difficulties encountered by grocery retailers in obtaining permission for new outlets. The chain also believes that Morrisons can afford to pay more because its estimate of the benefits from the merger has risen from an initial calculation of the equivalent of $402.4 million (US) to $529.6 million (US).
However, Morrisons is pointing to Safeway's “pretty rough” trading performance since the bid was first made and the smaller number of stores it will end up with. Morrisons also argues that the price achieved for the 53 stores could be lower because the bidding will be limited to three parties. It is expected to take up to two months for Morrisons to agree detailed undertakings with the Office of Fair Trading on the store disposals required and then come up with a fresh bid, meaning that Safeway's fate may not be settled until next January. Also, Morrisons may still face competition from retail entrepreneur Philip Green who so far has still not revealed his intentions.
The blocking of Asda throws up one major further question: what will Wal-Mart do next? The company has highlighted that it may start pursuing opportunities in smaller store formats, although it has yet to signal whether this will be via organic expansion or acquisition. The UK press, meanwhile, has been having a field day touting possible bid targets that Asda might be interested in, active in both the grocery and non-food sectors. These have included:
Matalan: Large edge-of-town and out-of-town stores that sell a mix of clothing, footwear and household goods. Operates a membership system where consumers pay a one-off nominal fee to be able to shop at Matalan. The company trades through 163 stores with an average sales area of 27,659 square feet. Would be a fast way of expanding the sales of the George clothing range, but the main problems remains the large family shareholding in the business that precludes a hostile bid. Tesco has reportedly been in takeover talks with Matalan too.
Woolworths: Recently demerged from the Kingfisher group, Woolies sells clothing, confectionery, video & music toys and household goods through 808 high street shops (8,460 square feet on average) and 18 large out-of-town Big W superstores (81,400 square feet). This potential deal would be a fast-track for George to increase its high street presence and would also bolster Asda’s market share in entertainment and toys. An alternative would be to pick up the Big W chain alone, the big box format a more familiar terrain for Asda.
Primark: Owned by the conglomerate Associated British Foods, Primark trades through over 100 stores in the UK and Ireland (trading as Penneys in Ireland), selling discounted family clothing and footwear. Again, Primark would enable the George brand a quantum leap in sales, but there is no evidence that ABF is willing to sell what is a very successful business.
Somerfield: Major grocery retailer that trades as Somerfield (608 supermarkets) and Kwik Save (661 soft discount stores). Has struggled since the merger with Kwik Save and has been linked with several takeover attempts. Would satisfy Asda’s demand for smaller store formats, but there would be a great deal of regulatory scrutiny over such a deal.
Iceland: Part of the Big Food Group, a leading grocery wholesale/retail business. Iceland, still seen as a frozen food specialist, has found the going tough in the competitive UK market. It operates nearly 750 stores in the UK plus a handful in Ireland and, like Somerfield, would enable Asda to massively expand its high street presence. Similarly, however, the regulators would want a careful look and Asda could face competition from Sainsbury’s, which is believed to have taken a look at Iceland as well.