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Michael Harrison's Outlook: Enter Sir Terry, stage right, pursued by Justin King (dressed as a gorilla)

Tuesday 20 September 2005 00:00 BST
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As food retailing becomes more and more of a commodity and prices are driven ever lower, supermarkets have become increasingly desperate to differentiate themselves from one another, hence Sainsbury's third makeover in the space of two decades.

What really differentiates the No 1 brand Tesco ("Every Little Helps") from the rest of the pack, however, is that it has almost twice the market share of its nearest rival Asda ("Always Happy to Help"). There will be no respite today when Sir Terry Leahy announces another set of stonking results and raises the bar even higher.

His critics in the small business and green lobbies have already got their retaliation in first denouncing Tesco's bully-boy tactics and demanding government action to protect down-trodden farmers. No wonder Sir Terry will be keener this morning to highlight Tesco's rapid overseas expansion than the fact that it now accounts for one in every three pounds spent in British supermarkets.

After a free run while the Office of Fair Trading was asleep at the wheel, allowing Sir Terry to run rings around them, the tide of regulatory and public opinion may be starting to turn against Tesco. Intriguingly, however, it is Asda in second place and William Morrison in fourth that are feeling the squeeze worst. Morrisons' troubles are self-inflicted. Having bitten off more than it can chew in buying Safeways it is now suffering from acute indigestion.

But Asda's malaise suggests something more deep-rooted. Sainsbury's is closing the gap, not just because Mr King's sales-led recovery is showing signs of working, but because Asda is going backwards. The massive buying power of its parent company, Wal-Mart, could only help so much. Now that Asda has saturated the market for shoppers who are attracted very largely on price, it is not so easy to see how it grows, given planning constraints and the draconian rules which now govern the buying and selling of large supermarket stores. Asda has tried its hand at pure non-food outlets, as Tesco now plans to do. But it has eschewed the convenience store format and would probably find it harder to buy its way into the sector today than a couple of years ago now that Sir Terry has shown the competition authorities what chumps they were in treating one-stop shopping and top-up shopping as separate markets.

In these circumstances, Sainsbury's offers an attractive alternative to those shoppers who are turned off by the might of Tesco, reluctant to pay Waitrose prices and would not be seen dead in an Asda or Morrisons.

Sainsbury's sales-led recovery has ravaged its margins, of course, and at some point Mr King will have to start turning customer growth into bigger profits. He may overtake Asda but catching Tesco long since became a lost cause. Urging shoppers to Try Something New will not be as effective as giving them the cheapest basket, as Sainsbury's has managed to do in each of the past four weeks. But at least Mr King may be starting to give Sir Terry some food for thought.

Take shelter from the perfect storm

They are calling it the "perfect storm", this confluence of cheap money, strong cashflows and the urge to consolidate which is driving the current mergers and acquisitions boom and, in turn, helping send stock markets ever higher.

Yesterday another two deals washed up on the shoreline - Deutsche Post's widely trailed £3.7bn takeover of Exel and a mystery £400m bid for the discount retailer Peacock, which, in the context of the current takeover frenzy, must rank as little more than a piece of flotsam and jetsam. At this rate, we are told, the M&A market will be back to the peak last seen in 2000, nicely in time for the Christmas bonus season in the City.

Three FTSE 100 companies have already gone or look like going this year and a sprinkling more are clearly on the auction block, while at Rentokil, the ego has landed if not the bid itself.

Unlike previous M&A bubbles, the current one has a number of distinguishing features. Bidders are largely paying in cash; much of the corporate action is coming from private- equity houses and most of the bids for UK companies appear to be coming from abroad. Furthermore, as our analysis opposite shows, for all the hype and the hullabaloo, the exit multiples at which companies are selling out this year is actually lower than it was in 2004.

In other words, there might be plenty of cash sloshing around the system and looking for deals, but there is less hot money chasing assets. Save perhaps for eBay's $4bn (£2.2bn) acquisition of Skype, a company with no profits and barely any sales, there is no evidence that the dot.com bubble is back, and even that deal represented just 4 per cent of eBay's stock market value.

Rather, the types of deals we are seeing are ones where dull companies with solid business models and reliable earnings are being acquired either by companies who can wring big savings out of them or grow into related markets as a result. Take the Exel deal or Saint-Gobain's pursuit of BPB. You could not get two more prosaic industries than haulage (or logistics to give it a posh title) and plasterboard.

Investment bankers will tell you that all this underpins the current value of the stock market and means that acquirers are not overpaying, nor is the current bid mania being driven by outsize egos with dreams of empire building. But takeover booms are takeover booms and history tells us that mergers overwhelmingly end in value destruction, often on a heroic scale. Because many of the acquirers are foreign owned, UK investors will be shielded from the effects. And because many are also private-equity funds, the value destruction will be less obvious at first. Ultimately, however, the institutional investors who supply the funds will feel the pain. If it is a perfect storm, then sooner or later the shipwrecks will start to appear.

Tim Scott

The bells of St Clement's rang out along the Strand yesterday in memory of Tim Scott, ICI's chief financial officer, who died tragically and suddenly last month while on a business trip to New York. The impressive turnout for Tim's memorial and thanksgiving service was a measure of the respect, admiration and affection in which he was held by friends and colleagues alike from the world of business and the City. ICI's chief executive John McAdam gave the address and described Tim as "a remarkable and unusual man: exceptionally gifted, thoroughly decent, approachable and friendly; tolerant, and invariably pleasant and courteous to everyone who got to meet him". There are many who can vouch for that, which is why he will be so sorely missed.

m.harrison@independent.co.uk

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