Morrisons says it cannot rule out hostile bid for Safeway

William Morrison, the Bradford-based supermarket chain, said it could not rule out launching a hostile bid for Safeway if the two groups are unable to agree on the terms of a recommended offer.

The move came after weekend reports that the board of Safeway, led by chairman David Webster, is insisting on a £500m cash "sweetener" in any revised Morrisons bid, increasing the value of the offer to £3.5bn.

Wm Morrison was the only one of four rival supermarket groups cleared to bid for Safeway by the Competition Commission last week. The Commission also made potential bids from the retail entrepreneur Philip Green or financial buyers highly unlikely by imposing strict conditions on store disposals.

Morrisons, which kicked off the bid battle for Safeway in January with a recommended offer worth £2.9bn, said a hostile offer could not be ruled out entirely.

However, a source close to the northern retailer added: "It wouldn't be their style. I would bet there will be an agreed bid because there is value in the offer being recommended. The question is how much value."

The Commission allowed the Morrisons bid to proceed on condition that it disposes of 53 of Safeway's 481 stores but banned Tesco, J Sainsbury and the Wal-Mart owned Asda from bidding outright. However, Morrisons is, in effect, restricted to selling the 53 Safeway stores to one of its three bigger rivals.

Safeway argues that the 53 stores should attract a premium price because of the difficulty supermarket chains have generally in obtaining permission for new outlets. It also argues that Morrisons can afford to pay more because its estimate of the benefits from the merger have risen from an initial calculation of £250m to £329m.

But Morrisons points to Safeway's "pretty rough" trading performance since the bid was first made and the smaller number of stores it will end up with. Morrisons also argues that the price it gets for the 53 stores could be lower because the bidding will be limited to three parties.

It is expected to take up to two months for Wm Morrisons to agree detailed undertakings with the Office of Fair Trading on the store disposals required and then come up with a fresh bid, meaning that Safeway's fate may not be settled until next January.

Safeway shares firmed slightly to close at 282.5p yesterday compared with the 277p they were valued at by the original Morrisons bid.