Safeway suitors warned by ratings agency

Related tags Safeway Asda

Tesco and Sainsbury could seriously damage their credit ratings if
they were to proceed with a debt-funded acquisition of Safeway,
ratings agency Standard & Poor's has warned. Tesco is already
overstretched after expanding rapidly, while Sainsbury needs to
complete its massive restructuring before considering further
growth.

Two of the leading candidates to buy the British supermarket chain Safeway have been warned that such a deal could seriously damage their ability to raise further cash - a serious problem in the current climate of rapid retail expansion - according to a report in the Financial Times​.

Ratings agency Standard & Poor's​ has said that an acquisition of Safeway by either Tesco or Sainsbury would offer little in the way of competitive advantage (since both chains would inevitably have to sell a large chunk of Safeway's stores to satisfy the regulators) but would certainly weaken their financial profiles.

Morrisons, the company which sparked off the bidding war with its initial offer to buy Safeway, is expected to be the only one of the four supermarket bidders for Safeway to be given the go ahead by the Competition Commission - whose report into the various bids for the chain was handed to the Department of Trade and Industry this week - because of its smaller size.

The fourth bidder, Wal-Mart's Asda unit, is thought to have made a last minute concession to the regulators, pledging to sell over 100 Safeway stores - a move which could have prompted the Commission to view its case more favourably

While neither Tesco nor Sainsbury are likely to be given the go ahead to bid for Safeway as a whole by the Commission, both might 'mop up' any Safeway stores offloaded by the eventual buyer, but this would not make good financial sense, S&P warns.

Its aggressive expansion in the UK and emerging markets has left the UK's number one supermarket operator Tesco with a weak financial ratio, since most of the acquisitions were funded by debt. S&P said that the company would not be able to maintain its current rating of A+ with a negative outlook unless its situation began to improve in the coming year - lower capital expenditure and a better return on its investments.

If anything, Sainsbury's situation is likely to be more badly affected by an acquisition of Safeway. The company has continued to fall further behind Tesco - losing the number two spot in the UK retail rankings to Asda in the most recent industry figures - as it struggles to restructure its business and maintain sales at the same time.

The company is currently rated A- with a negative outlook, and any debt-funded acquisition of Safeway, or any other chain, would seriously undermine the company's chances of successfully completing its proposed restructuring, designed to generate £700 million (€1bn) in cost savings.

The FT report said that S&P considered Asda to be less likely to suffer from a decline in its credit rating (AA with stable outlook) if it were to bid for Safeway primarily because it is backed by Wal-Mart, while Morrison, which currently has no rating, also has such low levels of debt - and a considerable pile of cash - that it would also be unlikely to suffer as a result of a Safeway takeover.

Related topics Market Trends

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