After the rumours, a bid for Safeway - from Morrisons

Troubled UK supermarket group Safeway has been the focus of many rumours in recent months, with larger rival Asda seen as a potential buyer. But it is in fact the regional supermarket group Morrisons which will buy Safeway - a deal which is much more likely to be approved by the competition authorities.

Morrisons, whose strongholds are in the Midlands and the north of England, has made a £2.9 billion (€4.4bn) offer for Safeway, a move which would create a major rival to Tesco, Sainsbury and Asda in the UK retail market.

The new company would have combined sales of over £12.6 billion and a market share of 16.1 per cent, according to Morrisons, operating 598 stores throughout the country, of which 479 are currently owned by Safeway. Scotland and the south east of England are the main trading regions for Safeway.

Despite being a regional player, Morrisons has continued to perform well in recent years, and its brand strength is good. Safeway, on the other hand, has struggled to keep up with the developments of its larger rivals, and has seen its brand equity decline as a result.

Therefore, combining Morrisons' brand strength with Safeway's national portfolio of stores should benefit both companies. Morrisons will be able to transfer its successful 'superstore' trading format into the smaller stores owned by Safeway, while the latter's customers will benefit from Morrisons strategy of offering high quality products at low prices.

The Leeds-based chain said it expected to lift sales per square foot in Safeway stores to the same level achieved in its own outlets by the third quarter of the year, while synergies from the acquisition should generate cost savings of £250 million a year by 2007.

Under the terms of the deal, which has been recommended by Safeway's board, Morrisons will own 53 per cent of the company. The offer price of 277.5 pence per share is a premium of 30.3 per cent over yesterday's closing mid-market price of Safeway shares.

The merger is expected to be completed by the end of the second quarter of 2003, assuming approval is forthcoming from the competition authorities.

Commenting on the merger, Sir Kenneth Morrison, executive chairman of Morrisons, said: "Merging with Safeway will allow Morrisons to accelerate the roll-out of its successful retail franchise across the UK, providing consumers with a distinctive offering and unlocking the benefits of scale for our combined shareholders."​

David Webster, chairman of Safeway, agreed: "In the last three years, Safeway has turned around, adding 1.5 million customers and rebuilding profits. As our market place becomes increasingly competitive a merger with Morrisons offers the best means of accelerating growth and delivering greater value for customers and shareholders."​

Carlos Criado Perez, chief executive of Safeway who has been outspoken in his criticism of analysts in downplaying the performance of Safeway in recent months in order to fuel merger speculation, said: "I am very proud of what the Safeway team has achieved over the last three years. This merger provides a fast route through the next stage of our strategy to increase the profitability of the portfolio."​

Store conversions planned​

Safeway owns 192 larger stores with sales areas above 25,000 square feet, as well as 166 stores with sales areas between 15,000 and 25,000 square feet and 121 smaller stores with sales areas below 15,000 square feet. Safeway's larger stores, with sales areas of over 25,000 square feet, will be converted to the full Morrisons superstore format, carrying the full Morrisons range of products.

Safeway stores with sales areas of between 15,000 and 25,000 square feet will also be converted to the Morrisons format and product range, albeit tailored to suit the available space, with an emphasis on a strong grocery, fresh food and wines and spirits offer. Morrisons said it expected sales from these stores to increase by 10 per cent by the third full financial year following the transaction.

For the smaller Safeway stores, the chain's name and trading strategy will be retained for the time being, reflecting Morrisons' acknowledgement of Safeway's expertise in this particular area.

Morrisons currently operates two regional distribution centres and has plans to build a third at a cost of approximately £70 million, intended to start later this year. The enlarged group will have a network of seven regional distribution centres, increasing to eight with the new Morrisons centre.

Each centre will service on average around 80 stores of all sizes, and will be supported by specialist distribution depots and all the current Morrisons and Safeway facilities will be required and fully utilised. The first distribution centre conversion is likely to be completed around three months after completion of the merger and the whole process is likely to take up to 18 months. Re-launch of individual shops under the Morrisons brand, with the Morrisons range as appropriate, will follow the pace of centre conversions.

The cost of converting stores is expected to be around £550 million per annum over the next three years, far less than the separate plans of both chains which would have cost around £700 million per annum in total.

Morrisons said it would continue to look for new store sites and that it was planning to spend some £300 million each year on around 10 new stores, depending on site and planning permissions.

Morrisons is currently the UK's fifth largest food retailer by market share, operating 119 superstores predominantly in the northern half of England, with 99 of these stores incorporating petrol stations. Morrisons also has a number of subsidiary businesses involved in produce packing, polythene bag manufacturing, meat processing and fresh food manufacturing and distribution.

Both Morrisons and Safeway said that they were confident of improving their respective positions as individual companies, but that the combination of their businesses would allow this improvement to take place more rapidly.

Morrisons posted record sales over the Christmas period, up 2.4 per cent on a like-for-like basis compared to the previous year. Safeway's like-for-like sales growth was 4.2 per cent, the company's best Christmas ever and the strongest performance since Safeway started the second phase of its restructuring strategy.