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OFT setback for Safeway suitors

Bid contest: Tougher targets likely for store disposals while Green is given unconditional clearance

Michael Harrison
Saturday 29 March 2003 01:00 GMT
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The four supermarket groups vying for Safeway suffered a fresh setback yesterday after the Office of Fair Trading indicated they may have to make much bigger store disposals than previously thought for their bids to stand any chance of success.

The OFT's detailed evidence explaining why it decided to refer all four trade bidders to the Competition Commission also casts doubt on their claims that shoppers would benefit from lower prices and increased cost savings if Safeway was taken over.

In contrast, the OFT gave the retail entrepreneur Philip Green unconditional clearance to bid after relying entirely on his reassurances that he would not weigh Safeway down with excessive debt or close it down and sell off its sites.

The biggest potential setback has been suffered by Wm Morrison, the northern-based supermarket chain whose agreed bid for Safeway was referred to the Competition Commission earlier this month along with those of Tesco, J Sainsbury and Wal-Mart/Asda.

Morrisons calculated that it would only need to dispose of a total of 10 to 12 Safeway stores to meet local competition concerns. But the OFT calculates that there are more than 70 overlaps between larger Morrison and Safeway stores.

In the case of Tesco, it puts the overlap at 200 stores compared with the 120 Tesco believes it would need to dispose of. For Sainsbury's the overlap is put at 150 compared with the 90 store disposals it offered the OFT and in the case of Asda, the overlap is put at 100 stores compared with the 60 or so disposals it is thought the company had in mind.

The OFT also produced some striking examples of the national and regional dominance that would result if any of the "Big Three" – Tesco, Sainsbury and Asda – were allowed to get their hands on Safeway. If Tesco or Sainsbury bought Safeway then 60 to 70 per cent of the national market for "one-stop, shopping" would be in the hands of just two companies. In some regions such as London and the South-east, their combined market share would be 75 to 80 per cent. Tesco alone would have 55 to 60 per cent of the market in Scotland and the South-west and 50 to 55 per cent in the Wales/West and East of England regions.

Although all four trade bidders offered the OFT undertakings to dispose of stores, it concluded that in no case was this a "clear-cut remedy" to the competition concerns their bids raised. The OFT was also lukewarm about Asda's "trump card" – the promise to bring Safeway prices down by as much as 15 per cent. It noted that although there might be "some potential for customer benefits" these did not outweigh the harm to competition.

Although rival bidders expressed concerns about the level of debt Safeway would inherit if Mr Green's bid succeeded, the OFT said it was "reasonable to accept that gearing will be sustainable". As to whether Safeway might cease to be a supermarket chain, the OFT said it was "not convinced that exit is sufficiently certain for us to take this into account".

Sir Peter Davis, Sainsbury's chief executive, stressed that the store overlaps identified by the OFT did not necessarily mean that the same number of disposals would be required and said he was still confident that it could meet competition concerns by selling 90 stores.

"Having read the OFT's detailed evidence, I am more encouraged than before. I think our position is stronger," he added. "But if I were Tesco I would be saying to myself they really don't want this to happen."

A spokeswoman for Morrisons said the 70 overlaps identified by the OFT was a "maximum, worst case, what if" number, adding: "We are confident that the level of disposals required would be well below this hypothetical level."

Morrisons refused to say what level it could live with but it is thought that the company would still proceed with the deal on the basis of 20 to 30 disposals.

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