Tesco joins the Safeway bidding game
to the temptation and is preparing a bid for Safeway - meaning that
all that four of the top five players in the UK market will now
slug it out for control of the food retailer. Tesco did not say how
much it was offering, but claimed that it would be able to retain
three-quarters of Safeway's stores and still satisfy the
regulators.
Given the huge amount of interest in the proposed sale of the Safeway supermarket group in the UK, it was only a matter a time before the country's number one player, Tesco, joined the fray.
And that is exactly what it has done, with the announcement this morning that it is considering making an offer for the company, subject to clearance by the UK Office of Fair Trading.
Sir Terry Leahy, chief executive of Tesco, said: "Our success has been built on competition and championing the consumer. We have always understood that competition policy limited consolidation in our industry. The authorities are now being asked to consider a major structural change among the four national supermarket chains.
"Internationally, and in the UK, we are a consumer champion, we successfully run a diverse range of store types and we have a world class management team. We therefore believe the interests of consumers would best be met if Tesco led any restructuring."Leahy explained that Tesco's offer would be a mix of cash and shares - like the proposed bid from arch rival Sainsbury's - and that it would be "compelling to Safeway shareholders and create value for Tesco investors"
.The OFT is currently assessing the various bids for Safeway, the UK's fourth largest supermarket chain, from Sainsbury's (the number two player), Asda/Wal-Mart (number three) and Morrisons (the number five group and the only one whose offer has been recommended by Safeway's board). While both Sainsbury's and Asda would have to sell stores to satisfy the regulators, it is thought that the much smaller Morrisons group could acquire all of Safeway without any need for disposals.
Tesco, being the UK's biggest food retailer, would also have to sell many Safeway stores to satisfy the OFT, but Leahy said that the company's leading position in the market made it the best-placed company to lead any restructuring of the UK market.
"More customers would benefit from Tesco value, quality, choice and service," he said. "Tesco has a proven track record of creating value for investors by improving stores and businesses it acquires, and we are confident of our ability to undertake an orderly and well executed restructuring of Safeway's store portfolio."
While stressing that Tesco was ready to work closely with the OFT to ensure that any deal left the UK market competitive, Leahy said that the Safeway portfolio of stores was in fact largely complementary to Tesco's own estate. As a result, he said, Tesco should be able to retain around three-quarters of Safeway's stores.
Leahy was clearly keen to play the magnanimous 'shoppers' friend' card, adding that not only would many communities 'welcome' the opening of a Tesco store but that they would also benefit from Tesco's low prices - Safeway's prices are currently some 11.7 per cent higher than Tesco's prices based on the 6,000 key lines found in bothstore chains, he said.
"From convenience stores to hypermarkets, Tesco successfully operates a diverse range of store types (Express, Metro, Superstore and Extra). Tesco is therefore best placed to improve the performance of Safeway's portfolio of stores by applying this expertise," Leahy said.
"In light of this and following a detailed review of Safeway's store portfolio, Tesco believes that it can raise the performance of the retained Safeway stores significantly. Tesco achieves industry leading weekly sales densities of some £22.33 per square foot compared to Safeway's £17.30. In addition to opportunities to increase revenue, Tesco has identified significant cost savings through improved operational efficiency, central cost savings and supply chain benefits."
The one piece of information missing from Leahy's clear attempt to soften up the OFT was the actual offer price for Safeway, but it is likely that Tesco will have to top the bids from rival players. Morrisons has offered 277 pence per share, while Sainsbury's has offered 300 pence per share. In addition to these two bids, plus that of Wal-Mart, two other potential offers are thought to be on the table - from US equity group KKR and UK entrepreneur Philip Green.
The OFT is currently reviewing the Morrisons, Sainsbury's and Wal-Mart bids, and will now presumably have to look at Tesco's offer as well. It is calling for comments on the various offers, and is expected to make a decision on each bid very soon.
