Asda and Kingfisher call off talks

By Nigel Cope

Associate City Editor

MERGER talks between Asda and Kingfisher broke down at the weekend after the two sides failed to reach agreement on a pounds 13bn deal. Talks were said to be "completely at an end" and, although neither side would rule out a return to the negotiating table, insiders said it was unlikely.

Asda, however, claimed the talks had only been exploratory "low key" discussions about how the two companies might have worked together in the UK on areas like clothing, entertainment and pharmacy. It said merger terms had not been discussed.

"They never were merger talks. They were really discussions about ways of working together and considering those areas of overlap between us," a spokeswoman said. The suggestion was that the talks centred on the possibility of Asda selling its "George" clothing range through Woolworths with branches of Superdrug and Comet opening in Asda superstores.

However, other sources indicated that the discussions were specifically about a merger of the two companies which would have created a new retail powerhouse with interests spanning food, clothing, DIY, electricals and pharmacy. It is understood that management roles were discussed and that Sir Geoff Mulcahy, Kingfisher's, chief executive, would have been executive chairman of the combined group. Allan Leighton, Asda's chief executive, was likely to take the chief executive position.

"I can see Allan and Geoff working together and I can see synergies between the two groups," said Nick Bubb, retail analyst at SG Securities. "It would be a merger of equals but in a way it is surprising because Kingfisher has a very solid strategy of going into electrical retailing and DIY in Europe." Mr Bubb said that linking up with Woolworths would be a way for Asda to fulfil its stated ambition of making its George clothing label the UK's number two clothing brand after Marks & Spencer.

Talks between Asda and Kingfisher started about two weeks ago with the initial contact being made between Sir Geoff Mulcahy and Archie Norman, Asda's chairman. Mr Norman used to work with Sir Geoff as Kingfisher's finance director until joining Asda in 1992. Though both sides claim the other made the initial approach, the subsequent talks were held between Sir Geoff and Mr Leighton. The final meetings were all-day talks in London on Friday.

Though neither side would comment on the reason for the collapse of the talks, it is understood Asda was worried by complications that could have arisen because of the level of integration between Kingfisher's UK and international businesses.

A merger between the two would have created a huge business which would have been Britain's second largest retailer after Marks & Spencer. Kingfisher has more than 2,000 stores spread across a variety of formats including Woolworths, B&Q, Comet and Superdrug. It owns the Darty electricals business in France and the MVC and Entertainment UK music and video businesses. Kingfisher's shares have soared over the last three years after a radical boardroom overhaul three years ago.

Asda has become a big success story in the supermarket sector after teetering on the brink of collapse in 1992. It has now established itself as Britain's third largest supermarket group after Tesco and Sainsbury's. Its sales growth is the best in the industry.

As well as cross fertilisation of products in each other's stores, a merger would have generated cost savings through greater buying power in certain sectors like clothing, entertainment and pharmacy. The two businesses have similar trading philosophies as Kingfisher pioneered the "every day low prices" approach. They are also of similar size. Kingfisher is the larger company in terms of market value, with a capitalisation of pounds 7.2bn compared with Asda's pounds 5.5bn. But Asda is the larger in sales with turnover of pounds 7bn against Kingfisher's pounds 5.8bn.

Kingfisher's acquisition activity has been centred on the Continent most recently, with deals in France and Germany. Asda, though, has the look of a company in search of a deal, according to some analysts. It looked at buying the Welcome Break service stations in a pounds 400m deal a few years ago. Then last year news broke that it in talks with Safeway about a possible pounds 10bn merger, although the tie-up foundered on concerns that the deal would be subjected to a long and disruptive investigation by the competition authorities.

A deal with Kingfisher would be unlikely to encounter regulatory problems. However, there might be problems over the different cultures of the two businesses and who might take the top jobs.

Asda has a very informal management style with open plan offices in Leeds and first-name terms among managers. Kingfisher is a more formal company with a London head office that delegates much of day-to-day operations to the individual businesses. At board level, some analysts say it would be difficult to see Sir Geoff or Mr Leighton wishing to play second fiddle to the other in an enlarged group.