French retail deal prompts talk of copycat acquisitions

Promodes approached by Ahold before agreeing Carrefour merger Retail shares rise on speculation of more supermarket deals t Supermarket sector shaken by Wal-Mart's arrival in Europe
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THE DUTCH supermarkets giant Ahold has been sniffing around both Carrefour and Promodes and was almost certainly in the final stages of preparing a bid for the smaller of the two, it emerged yesterday after the French retail chains announced details of a pounds 32bn merger.

Across Europe, retail shares rose on speculation that the French move may unleash a wave of copycat acquisitions. Analysts said general and food retail groups such as Tesco, J Sainsbury, Safeway, Marks & Spencer and Kingfisher could gain as much as 4 to 5 per cent when the London market, shut for the bank holiday yesterday, begins trading again.

"This has basically brought a lot of possible deals into play," said an industry analyst. News of the merger coincided with publication of a study by Verdict, the retail consultants, which said the UK supermarket sector is on the threshold of a new era characterised by lower margins, high profile casualties and a spate of mergers and acquisitions.

Carrefour's president, Daniel Bernard, who will head the new combine, denied that the marriage was defensive and said it would bring considerable synergy benefits. But he conceded he had one eye on his rivals.

Ahold's ambitions go some way to explaining the hurried nature of the latest outbreak of Gallic merger mania. The two companies have also been jolted by recent incursions into Europe of the world's leading retailer, Wal-Mart, which last year bought two German hypermarket chains and last month acquired Asda in Britain. The obvious next step for the Arkansas- based giant was France.

The American titan's march into Europe has been seen as incomplete without a French conquest. Germany, France and Britain are Europe's three largest markets and Wal-Mart needs to be in all of them to achieve its customary economies of scale. "Wal-Mart is one of the main triggers for consolidation in Europe," said Salomon Smith Barney in a recent report. "[But] it still lacks access to France."

Like the putative fusion of three French banks, which collapsed at the weekend, motives for the Carrefour/Promodes merger are both global and inward-looking. By forming a mega-company, the two groups hope to compete more successfully on the international market. The combined company inherits interests in Belgium, Spain, Portugal, Greece, Brazil, Argentina, South Korea and Taiwan.

But maintaining French control of two meteorically successful French family businesses was an equally important factor in a deal put together by the two "friendly" presidents, Daniel Bernard and Paul-Louis Halley. As in the contested merger between the Elf and Total oil companies, the French response to the challenge of the global market is to avoid foreign entanglements, where possible, and to make French companies bigger.

"We are still smaller than the biggest companies that are far from renouncing their intentions to become ever more powerful," Mr Bernard told a joint news conference yesterday.

The two firms' founding families and their allies will hold 33.5 per cent of shares in the new firm and have 35.8 per cent of voting rights - sufficient to halt any future hostile bid. The French stock market rules that 33 per cent of voting rights constitute a blocking minority.

Analysts in Amsterdam said the French retailers' merger may yet inspire Koninklijke Ahold into an attempt to boost its power across Europe, with the French retailer Casino a possible target. An Ahold spokesman said that it would not carry out any hostile bids, but added that the firm was interested in players in France, Britain, Italy and Spain.

In Germany, Metro said it was watching the Carrefour-Promodes merger closely. With Metro eager to increase its international presence, the French deal has roused speculation that it might seek a deal of its own to protect its market share. "One thing is sure ... this merger will push other competitors together," said one analyst. "Wal-Mart will be watching very closely."

The deal offers six Carrefour shares for each Promodes share - a 20 per cent premium on the Promodes price on the Bourse last week. Unlike the messy banking war of the past six months, it will be difficult for a hostile predator to intervene. Something approaching half of the shares in all three banks involved were owned by foreign pension funds. In contrast, more than half the voting shares in Promodes, which began as a wholesale company in Normandy in the 1960s, are still owned by the founding Halley family. Mr Halley, 65, plans to retire to a strategic, overseeing role.

The enlarged Carrefour group will have a turnover of Ffr335bn (pounds 33bn) and will control 25 per cent of the food-based, household retail market in France. Apart from the Carrefour chain of supermarkets and hypermarkets, it will have the immense Continent warehouses for food and household goods, from Camembert to washing machines. Altogether, the company will own 8,800 shops in the world and 4,000 in France, from the corner mini-market "huit a 8" stores to the largest retail site in Europe, the vast Continent store at Mondeville near Caen in Normandy.

The merger will also have a big impact in Spain, where the French groups own the nation's two biggest hypermarket chains. Continente is majority owned by Carrefour, and Pryca is controlled by Promodes. Combined, the two companies would have 114 Spanish hypermarkets and annual sales of 8.6m euros. Pryca and Continente would also have 140 supermarkets and 2,000 cut-price stores with a combined market share of around 17 per cent, BSCH analyst Javier Valverde said. This would put Continente and Pryca streaks ahead of competitors and prompt a flurry of corporate activity in the national market.

Mr Bernard said yesterday that the ambition of the group was to win "the world retailing battle" that was about to begin. "The rapprochement happened naturally because these two companies were already very fond of one another," he said.