Asda and Kingfisher resume alliance talks

ASDA and Kingfisher have resumed talks about a possible trading alliance less than two weeks after negotiations about a pounds 13bn merger broke down.

Though the talks centre on cross-selling opportunities between the two retailers, sources close to the negotiations said they could be broadened to include a full-scale merger.

The discussions are thought to be at a relatively early stage and do not yet include Asda's chief executive, Allan Leighton, and Kingfisher's chief executive, Sir Geoff Mulcahy, who spearheaded the original merger discussions.

The centrepiece of the talks is potential interaction between the two companies. This could see Asda selling its George range of clothing through Woolworth's, and Kingfisher opening branches of its Superdrug pharmacies and Comet electrical formats in Asda's superstores.

Asda's stated ambition is to make the George label Britain's best-selling clothing brand behind Marks & Spencer's St Michael. It may need to access space on the High Street in addition to its out-of-town supermarkets to do this.

Kingfisher is always hungry for more space and Sir Geoff Mulcahy is a keen deal-maker. A merger of the two would creat Britain's second largest retailer after M&S.

The re-opening of the talks will come as a surprise to the stock market following comments less than a fortnight ago that discussions were "completely at an end." The two sides then gave differing versions of events and both claimed the approach had come from the other side.

Surprisingly, Yesterday Asda denied the resumption of talks and would only repeat its original statement: "We had discussions and they came to an end."

Kingfisher was similarly reticent, saying only: "The discussions between the two have ceased."

Asda has looked increasingly keen on a deal recently having looked at the Welcome Break motorway service stations, a pounds 10bn-merger with Safeway and a pounds 13bn-merger with Kingfisher.

Though Asda is confident that it has sufficient scope for growth in the medium term, it is looking for avenues of growth further out. With Tesco increasing its non-food ranges and opening larger, hypermarket stores under the Tesco Extra name, Asda is under pressure to continue with innovations.

It is already looking at introducing mezzanine layers in stores to add more floor space that could carry non-food lines such as music and entertainment, health and beauty and clothing.

It is also opening drive-through restaurants offering refreshments for time-pressed shoppers.

Kingfisher would come to the negotiations from a position of equal strength. It has enjoyed a hugely successful run in the last two years boosted by strong performances at its DIY business and a recovery at Woolworth's.

Sir Geoff is now keen on building Kingfisher into an international retailer but is still keen in developing market share in the UK.