City urges Safeway to resurrect Asda merger talks

Safeway is under growing pressure from the City to re-open merger talks with Asda after the two sides abruptly abandoned negotiations over the weekend to create Britain's biggest supermarket group. Michael Harrison examines the prospects for resurrecting the deal.

Institutional shareholders in Safeway yesterday urged the company to resurrect its pounds 9bn merger talks with Asda even at the expense of undergoing a long examination before the Monopolies and Mergers Commission.

The two groups said on Sunday that they had discontinued talks because it would not now be possible to get confidential guidance from the Office of Fair Trading about whether the deal was likely to escape an MMC referral.

Advisers on both sides claim that a lengthy MMC investigation would undermine staff, customer and supplier loyalty and would not be worth risking.

However, one major Safeway shareholder said last night: "After having performed well, Safeway is beginning to lose ground to Tesco. It lacks the critical mass and scale that a merger with Asda would have given. It is such a great deal that I think that, having raised the prospect of a merger, they will be under pressure to push it further.

"It is such an attractive deal that I would urge them to press ahead even at the risk of a lengthy investigation by the regulatory authorities." One of Asda's biggest shareholders was more sceptical, however, saying: "Safeway's shareholders are desperate to get a deal but shareholders in Asda aren't."

Although the confidential merger proposals, submitted to the OFT in July, had not gone to Margaret Beckett, President of the Board of Trade, it is thought almost certain she would have called for an MMC investigation.

The merger, if it had gone ahead, would have created a group with 15.3 per cent of the UK's pounds 85bn a year food retailing market, outdistancing both Tesco and Sainsbury. Together, Safeway and Asda would have combined sales of pounds 14.5bn, 600 stores, pre-tax profits of pounds 826m and a market capitalisation of pounds 9.15bn.

To overcome competition concerns they had identified pounds 200m in savings which would largely have been passed back to customers, increasing the pressure on Tesco and Sainsbury to cut prices.

Both companies fought yesterday to rebuff suggestions that the failure of the merger talks had put them in play, particularly Safeway which first approached Asda with the idea of a merger earlier in the year.

Safeway denied that it had approached other stores and supermakets groups here and in the US, including Marks & Spencer or that it was now under pressure to shore up its defences by buying a smaller competitor such as Somerfield or Budgens.

However, news of the aborted talks with Asda caused a flurry of action in the markets. Shares fell sharply in Tesco and Sainsbury, the two supermarket leaders with 15 per cent and 13 per cent shares respectively of the pounds 85bn UK food retailing market. Safeway shares rose on speculation that it may now be vulnerable to a bid while Asda shares closed down slightly.

However, another institutional investor said that of the two groups, Asda might find itself the more exposed. "The merger talks have exposed a weakness which needs to be addressed but, if anything, Asda may be more vulnerable than Safeway. Safeway has traditionally been more profitable and better established while Asda has a relatively new management."

Retail analysts questioned whether either company was necessarily exposed since neither was likely to be a takeover target for a rival UK supermarket group , given the competition constraints.

"I can't see what the synergies would be of a US supermarkets group buying Safeway and although there might be some benefits of doing a deal with a European chain in terms of purchasing power there would no gains in terms of central distribution," said one analyst.

He also questioned whether smaller supermarket groups were now vulnerable to a defensive takeover. "If the whole idea was that Safeway was looking to take on the Asda format, what is the point of moving down a step in size?"

Morrison is family controlled while Somerfield, though possessing some large stores, has many more small format supermarkets.

Outlook, page 25

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Telesales Executive - OTE £25,000

£13000 - £25000 per annum: Recruitment Genius: Would you like to be part of a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Are you passionate about sale...

Ashdown Group: Graduate Developer (Trainee) - City, London

£25000 per annum + benefits: Ashdown Group: A large financial services company...

Ashdown Group: Marketing Assistant - Financial Services Sector - London

£20400 per annum: Ashdown Group: An established and highly reputable organisat...

Day In a Page

The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future