No Pain No Gain: Years of dedication and patience are rewarded after a bumpy ride

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The Independent Online

The no pain, no gain portfolio has enjoyed a relatively cheerful degree of corporate action since it was born nearly four years ago. Two of its three long-standing Footsie shares have generated take-over excitement. There was the bruising free-for-all when Punch Taverns and Whitbread indulged in an uproarious battle for the Allied Domecq pub chain. And, in its endeavours to become a global beer player, Scottish & Newcastle splashed out £1.2bn for the Hartwall brewing group, taking it into the Russian market.

But, reflecting my preference for the stock market's undercard, much of the activity has been pretty small stuff – like the construction group Galliford taking over its rival, Try, or Burtonwood Brewery buying a near 100-strong pub chain. Only on one occasion has a constituent been on the receiving end of a bid. Montana, an aspiring restaurant group, was the target. It was swallowed, in what turned out to be a profitable exercise for the portfolio, by Hartford, now largely a bars group but then nursing ambitions to become a major force in London's ever revolving eating-out business.

Now, however, we are in the big time. Safeway, my third long-standing Footsie share – my other Footsie stock, Six Continents, arrived late last year – has at long last collected the bid every City man (and his dog) realised was probably inevitable. It was one of my first recruits, joining the portfolio in April 1999. I alighted on the supermarket chain because of its (then) recovery potential and the perennial chance of takeover action. It duly delivered on the trading front.

My 1999 bid candidates were Wal-Mart, the US retail behemoth that subsequently descended on Asda, and Royal Ahold, a Dutch group. Now Safeway is the prize in a three-way battle. Wal-Mart has, like J Sainsbury, declared its interest in bidding, provoked into action by Safeway's acceptance of a cheapskate offer from the Wm Morrison supermarket chain.

I am, of course, pleased my long-term dedication to Safeway has been rewarded. It has been a bumpy ride, requiring considerable patience. Indeed, if I had adopted a stop-loss formula, the shares would have long ago been kicked out of the portfolio. I paid 248.5p; the price subsequently fell to below 160p, then went above 400p as the chief operating officer, the Argentinian Carlos Criado-Perez, an ex-Wal-Mart executive, inspired an impressive trading recovery.

But in the past six months or so the shares have lost ground. Although it appeared to me that the Criado-Perez magic was still producing results, Safeway was subjected to an intense City whispering campaign. Talk abounded that its revival was running out of steam and margins were being squeezed. It was wide of the mark. Still, with the shares weak it is perhaps not surprising that the chairman, David Webster, decided to open the bidding process by negotiating the Morrison offer.

However, I am not at all impressed by the terms of the all-share bid. It seems the Yorkshiremen at Morrison are attempting to extend their cut-price policy to the stock market. Quite clearly, monopoly considerations permitting, Safeway is worth much more than Morrison has put on the table. However, as Mr Webster no doubt intended, its bid has forced Sainsbury and Wal-Mart into action.

But shareholders may be unwise to merely sit back and watch the fun. In the present frenzied supermarket climate Safeway should command more than 300p a share – perhaps nearer 400p. But the company may not fall to the highest bidder. Political influences could prompt one of those absurd compromises that would leave everybody relatively happy except the poor, much-maligned shareholder. Morrison's adventure raises few, if any, monopoly considerations; Wal-Mart and Sainsbury know they have a monopoly fight on their hands.

There is still the chance of another bidder entering the fray. After all, Safeway probably represents the last chance of a supermarket carve-up in this country and a Continental group or even a venture capitalist could still be interested in barging in, particularly as Safeway is still underpriced.

On present form it seems unlikely that any of the three current protagonists will enjoy a complete victory. Morrison does not face monopoly problems but it is likely to be so heavily outgunned that its best hope is a dignified retreat. Perhaps it will collect a portfolio of stores as a consolation prize. For Safeway is finished. It is likely to be broken up, with Asda, Sainsbury and, perhaps, even Tesco, taking on its outlets.

The high level of uncertainty makes it unlikely I will wait until it is decided which brands occupy which Safeway shelf space. I will be happy to settle for a reasonable profit. Indeed, a level comfortably above 300p will be enough to tempt the no pain, no gain portfolio into selling.

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