Morrisons cleared for Safeway takeover

Morrisons, the company which was the first to bid for the Safeway chain back in January, is the only supermarket operator with permission to acquire the group following the long awaited ruling from UK Trade and Industry Secretary Patricia Hewitt on Friday.

The ruling was in line with the recommendations of the Competition Commission (CC), which had suggested that the proposed acquisitions of Safeway by Asda, Sainsbury and Tesco would be detrimental to competition and should be prohibited.

The rumour mill had been circulating for some time, and it came as no surprise that Morrisons was the only company allowed to proceed. All the other three bidders are far larger than both Morrisons and Safeway, and there would have been considerable overlap with Safeway's stores.

But even Morrisons will not be allowed to proceed unchecked. The CC's report stipulated that the Yorkshire-based supermarket group would have to sell 53 stores in order to gain final approval for a Safeway takeover, although this is fewer than had originally been thought. Forty-eight of the stores are one-stop shopping stores (stores greater than 1400 square metres in size), while five are smaller stores

Nor will the companies whose bids were blocked by the CC go home empty handed. Tesco, Sainsbury and Asda will all be allowed to bid for any of these stores, although these bids will also be subject to scrutiny from the competition authorities.

All the bidders for Safeway had expected to have to sell stores to satisfy the regulators, but Hewitt said that the CC considered that "no reasonable package of divestments would remedy the national competition concerns raised in these cases"​.

The CC undertook a detailed analysis of local markets in order to identify those areas where local competition issues arose and divestment would be necessary. The criterion used for this was a reduction to three or fewer fascias in any one locality. The parties were given an opportunity to present arguments as to why certain 'problem' stores should not be considered as such before the CC reached a final view. The CC concluded that where there were 'problem' stores, divestment of either the Morrisons or Safeway store would be sufficient to remedy these adverse effects.

Morrisons was delighted by the news, which chairman Sir Ken Morrison claimed "supports our view that a merger of Morrisons with Safeway will create a strong fourth national food retailer to the benefit of customers, employees, suppliers and shareholders".​"Merging with Safeway will allow Morrisons to accelerate the roll-out of its successful and popular retail format across the UK, providing consumers with a distinctive offering and unlocking the benefits of scale for shareholders."​ The chain will now begin negotiations with the Office of Fair Trading over which stores will be sold, a process which Morrison said would take several weeks. But he also warned that there was no certainty that the company would proceed with the takeover.

"Our duty to our shareholders is to carry out a thorough assessment of the implications of all developments since the lapse of our bid and any conditions attached to our proposed clearance by the Secretary of State. We will only proceed with any new bid if it is in our shareholders' best interests."​

In reality, the question is not whether Morrisons will proceed with its bid but rather what price that bid will be at. The lengthy authorisation procedure has done little to help Safeway's results, and Morrisons could argue that the company is now worth substantially less than it was at the start of the year, when it was valued at £2.85 billion by Morrisons.

Safeway's shareholders are clearly conscious of this possibility, with reports in the UK press today suggesting that they are urging the retailer's board not to rush to accept a new offer from Morrisons, no doubt in the hope that a higher price can be negotiated - after all, Morrisons' opportunities for growth would be severely limited without the Safeway acquisition.

Nor is Morrisons the only potential buyer. An offer could still come from Trackdean, the investment company owned by retail entrepreneur Philip Green. Trackdean was not subject to the Competition Commission's investigation because Green's background is not in food retailing (he owns the BhS department store group), and while no bid has as yet been made by the company, Green last week reiterated his interest in Safeway.

Assuming the price is right for Safeway's shareholders, a takeover by Morrisons would certainly revitalise the ailing chain, with the smaller group far more successful at generating revenue per store than its larger rival.

At the time of its original offer for Safeway, Morrisons said it would lift sales per square foot in Safeway stores to the same level achieved in its own outlets in the short term, at the same time generating cost savings of £250 million a year by 2007.

The new company is expected to have combined sales of over £12.6 billion and a market share of 16.1 per cent, according to Morrisons, operating around 550 stores throughout the country. Scotland and the south east of England are the main trading regions for Safeway, while Morrisons is strongest in the Midlands and north east England.

Morrisons' original plan was to convert the larger Safeway stores - those over 25,000 square feet - to its own superstore fascia, while the Safeway stores with sales areas of between 15,000 and 25,000 square feet would 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 merger.

For the smaller Safeway stores, the chain's name and trading strategy were to be retained, reflecting Morrisons' acknowledgement of Safeway's expertise in this particular area. However, it is likely that many of these stores will now have to be sold to meet the Competition Commission's requirements, effectively marking the disappearance of the Safeway fascia in the UK.