Can Ken turn Project Diamond into a gem?

Code-named Project Diamond, the Morrisons-Safeway deal was first hatched in November when Sir Ken Morrison approached David Webster. The pair met on neutral ground at Nuthurst Grange, a country house hotel near Stratford-upon-Avon in Warwickshire. It was half-way between Morrisons' Bradford head office and Safeway's headquarters in Hayes, Middlesex.

Ironically, the 15 bedroomed house, set in seven-and-a-half acres of landscaped gardens, was the former home of Mr Webster's great grandfather. No doubt Mr Webster chose the location for that reason.

The pair kept the deal under wraps despite speculation that Safeway was a bid target. Few suspected the bidder would be Morrisons, which had always spurned deals, in favour of a homespun approach to organic growth. If Morrisons does land the prize, the City believes it faces a significant "execution risk" in integrating the biggest deal in its 104-year history.

Merrill Lynch changed its stance on Morrisons' shares from "buy" to "neutral" yesterday partly because of this. In a research note entitled "A bridge too far" it pointed to Morrisons' lack of big deal experience. Paul Smiddy of Robert W Baird Securities made the point that Morrisons' low-price format is unproven in more "upscale" areas in the South of England. "Morrisons will have to be sensitive and learn about how to operate in these areas," he said.

Another point is the costs of maintaining the Safeway brand as the majority of the stores are converted to the Morrisons format. The biggest challenge is integration. Possible problems include cultural differences and the sheer scale of the management task for a relatively small team. Sir Ken expressed confidence in this yesterday. "I feel we've got the management team in place to handle this," he said.

Morrisons says that by the third full year it hopes to raise sales per square foot at Safeway's larger stores from the current level of £15.10 to Morrisons' £18.80. This will partly be achieved through lower prices boosted by increased buying power.

Over the next three years Morrisons will invest £550m a year in store conversions, new store openings and improved infrastructure.

Morrisons will also invest more in the vertical integration that has served it so well in the past. It has its own fresh food manufacturing subsidiary which produces pizzas, pies and sausages as well as a packing plant for cheese and bacon. All fresh fruit and vegetables are packed, stored and distributed by another Morrisons subsidiary.

The enlarged group plans to spend £450m over three years opening an additional distribution centre, several new packhouses, a fresh food factory, two abattoirs and a head office.