Morrisons in the clear for Safeway

Hewitt blocks bids by Tesco, Sainsbury and Asda; Curb on store disposals may deter financial buyers

WM Morrison, the northern supermarket group, was yesterday given the green light to buy Safeway after the Government blocked its big three rivals from bidding and put a major obstacle in the path of the retail entrepreneur Philip Green and potential financial buyers.

The long-awaited outcome of the competition probe into the future of the supermarket sector decreed that four national chains would continue to serve the shopping public by prohibiting bids from Tesco, J Sainsbury and Wal-Mart's Asda.

Patricia Hewitt, the Secretary of Trade and Industry, accepted the Competition Commission's findings in ruling that only Morrisons could proceed with its near-£3bn bid provided that it disposed of 53 stores.

Ms Hewitt said prices would have gone up and choice gone down if Tesco, Sainsbury's or Asda were allowed to bid adding that "no reasonable package of divestments would remedy the national competition concerns raised in these cases".

Shares in Safeway dived 7 per cent to 276p on the news, which all but wiped out the prospect of a bid battle. Sainsbury's shares also fell, dipping 2.25p to 275.5p on concern over the threat posed by a stronger number four, while Tesco's shares rose 6p to 241p, on relief that Asda's attempt to close the gap on the market leader had failed.

All three bidders expressed their disappointment at what was regarded as a tough outcome by some City analysts. All three are expected to bid aggressively for those Safeway stores they are allowed to acquire - around 16 in Asda's case and around 24 for both Tesco and Sainsbury's. Mark Hughes, at Numis Securities, estimated the store disposals could raise up to £450m for Morrison, although some analysts' estimates went as high as £600m.

Sir Ken Morrison, the chairman of the Bradford-based company, will begin talks with the Office of Fair Trading on Monday to agree a blueprint for the store disposals. His team will also begin preparing a fresh offer for Safeway, by re-starting work on due diligence. Analysts expect Morrison to sweeten its previous - and now lapsed - all-share offer with up to 50p-per-share of cash.

A new bid could be more than two months away, sources close to Morrison cautioned, because the company has a 21 day-window after it reaches agreement with the OFT about which stores it plans to sell before it has to launch an offer.

With more cost savings to play for - the report revealed that Morrison had identified up to £329m in merger benefits from a Safeway deal, compared with the £250m it estimated in January - analysts believe Morrison has the necessary firepower to inject some cash. Tony Foster, at Scottish Widows, one of Safeway's biggest investors, said: "Although there are restrictions on the ways Safeway can deliver on its asset base, we are looking for [about] 300p per share".

Among the arguments cited by the Commission for blocking Asda, Tesco and Sainsbury, were that reducing the number of leading supermarkets from four to three would cause price rises at both national and local levels, limit competition for new sites thereby strengthening the status quo and weakening the bargaining position of some suppliers. "No reasonable divestment programme would adequately restore a fourth national competitor," the 500-page report stated, echoing the OFT's advice.

While the outcome of the five-month competition inquiry was in line with the market's expectations, some analysts expressed surprise that the Commission had blocked the rival bidders on local as well as national grounds.

"We were very, very confident that more than 250 sites could have been bought by Asda on an individual basis without breaking drive-time guidelines," Numis' Mr Hughes said. "Asda will be furious. I would expect them to mount some sort of legal action if only to spin [the outcome] out as long as possible," Paul Smiddy, at Robert W Baird Securities, added. However, Asda played down the prospect that it would mount a legal challenge. A spokesman said: "It's a long report and we need to read it, but we have no plans to do that."

Alastair Gorrie, competition lawyer at Coudert Bros, said the Commission had dealt effectively with an eleventh-hour proposal from the US-owned group that would have seen it carve up Safeway with Morrison. "It looks unlikely that there could be grounds for judicial review on that issue," he said.

Analysts said that by limiting the number of Safeway stores that could be sold to Asda, Tesco or Sainsbury to 53, the Commission had made it much less likely there would be a rival bid from Mr Green or a financial buyer interested in breaking the group up and selling it on piecemeal.

Mr Gorrie added that report also ruled out any further major consolidation in the sector - although analysts expect both Somerfield and the Big Food Group to be bought before long. "The Commission does seen to be ring fencing the fourth player," he said.

Had Asda been allowed to bid, it would have been forced to sell off up to 164 stores, while Sainsbury would have had to dispose of 222 stores and Tesco up to 264, the report showed.