Bid battle in prospect as Morrison bags rival Safeway for £2.5bn

Safeway could become the subject of a bid battle after its agreed £2.5bn all-share takeover by William Morrison Supermarkets, City analysts said.

Wal-Mart, which bought Asda for £6.7bn in 1999, is seen as the leading candidate though the US giant would risk becoming embroiled in a lengthy Competition Commission investigation.

Paul Smiddy, at Robert W Baird, said: "This leaves the door open for Wal-Mart but there would be a big store overlap in that deal and the fourth player [Safeway] would be removed."

However, Andrew Fowler, at Merrill Lynch, said: "We don't believe there will be a counterbid. If Wal-Mart/Asda were to come in they would, in effect, be asking the competition authorities to sign off on a duopoly [Tesco and Asda-Safeway].

"This deal [Morrisons-Safeway] is the dream scenario for the Competition Commission.

Morrisons said there would only be about 10 stores out of the combined 598 that would overlap. But analysts said the figure could be higher, particularly in the North-east and Yorkshire. Even so, City experts said the deal was unlikely to fall foul of the regulators. They said it was a good fit, putting together Morrisons' northern strength with Safeway's strongholds in the South and Scotland. "It's a neat deal and means Safeway has got something in the bag whether Wal-Mart comes knocking or not," one retail executive said.

A bid from Tesco, the market leader, is seen as unlikely. "It is an interesting development. But it's business as usual for us," the company said.

J Sainsbury said it was "watching the situation with interest". It is seen as a key loser from the deal as it had been hoping to pick up stores if there was a break-up bid for Safeway. It also held talks with Wal-Mart about launching a joint bid for Safeway last year but failed to agree terms between them.

Shares in Tesco, J Sainsbury and other supermarket operators such as Somerfield fell sharply on news of the deal, which creates a powerful force in UK food retailing.

Safeway shares soared 20 per cent to 256p, ahead of the 237.6p value implied by the offer's terms. But Morrisons shares fell 14 per cent to 180p on fears the Bradford-based group might have problems integrating such a big acquisition.

The deal is a surprise as Morrisons had poured cold water on a bid for Safeway as recently as September. Bob Stott, the joint managing director, told The Independent at the time: "We haven't got the money to buy Safeway and we ain't for sale, so that's the end of story. We're interested to sit on the sidelines."

Asked what had changed, Sir Ken Morrison, the company's 71-year-old chairman, said yesterday: "We perceived an opportunity and the timing is right."

There will be 1,200 job losses as Safeway's head office in Hayes will be closed. Morrisons said there will be at least £250m of synergies. Under the terms of the deal, Safeway shareholders will receive 1.32 new Morrisons shares for each share held.

David Webster, Safeway's chairman, said: "I'm obviously sad because I go back to the original Argyll days of 1977 with Jimmy Gulliver and [Sir] Alistair Grant.... It marks the end of an era but I wanted to feel that when I go I have done my best to secure Safeway's future."

Mr Webster will leave with about £3m. He has 563,000 shares worth £1.5m and a two-year contract, which pays him £736,000. Carlos Criado-Perez, the Argentinian chief executive will also leave, with a pay-off of £613,000.Sir Ken will remain executive chairman. The company said it will appoint non-executive directors for the first time.