Safeway prepares for Green cash bid

Board drops recommendation for £2.5bn Morrisons offer as rival suitors close in

Safeway yesterday dropped its recommendation of the £2.5bn takeover bid from William Morrison Supermarkets, saying the possibility of a higher offer meant shareholders should "await developments". However, it said it still remained "fully supportive" of the Morrisons' bid.

The decision has been forced by the sharp fall in the value of Morrisons' all-share offer since it launched its bid. With Morrisons shares dropping, its offer is now worth just 234p a share compared with the latest Safeway price of 316p. Safeway shares have been boosted by six bidders entering the fray, with some indicating cash rather than all-share deals.

David Webster, Safeway's chairman, said: "The board of Safeway continues to believe that a combination with Morrisons represents an opportunity to create a new dynamic force in UK food retailing. However, in the light of the announcement by potential competing offerors, we are advising shareholders to await developments."

Morrisons said it had been kept fully informed by Safeway, adding that the decision was inevitable given the bid frenzy which has seen indicative bids made by J Sainsbury, Wal-Mart/ Asda, Tesco, Kohlberg Kravis Roberts and Philip Green.

Sir Ken Morrison, the Bradford-based group's chairman, said: "They continue to fully support our position and we look forward to their renewed formal recommendation once the circumstances are clarified."

Morrisons is entitled to a £29m break-fee if Safeway recommends an offer from another bidder.

One analyst said: "This move is not surprising given the gap between the Morrisons offer and the Safeway share price." However, the analyst said arbitrageurs might start to take some profits on their Safeway shares.

Morrisons is due to issue its offer document next week. There was fresh speculation that Morrisons might sweeten the terms of its bid with a cash element of about 70p a share but the company denied it.

Meanwhile, Mr Green, the retail entrepreneur, is believed to be close to launching a formal bid on a 21-day timetable. This would be designed to put pressure on investors to accept an early offer of cash with limited regulatory risk rather than wait for a higher offer from a rival bidder that may have more problems with the regulatory authorities.

The US venture capital group KKR is also thought to be close to securing £4bn in finance for its possible offer from a syndicate of five banks.

However, some competition experts suggested that financial bidders could also face regulatory hurdles. One said: "The OFT could ask a financial bidder to guarantee to run the business as a going concern rather than breaking it up, which would remove the fourth player from the market. They could also be concerned about leveraged financial structures and the potential impact on the business."

However, one investment banker said the 21-day bid timetable, in which the first closing date for acceptances would also be the last, was the most likely way for a financial bidder to secure victory. "That could be Philip Green's best chance, though institutions might not like it."

Meanwhile, Marks & Spencer declined to comment on renewed speculation that it was considering entering the bid battle, advised by Morgan Stanley. M&S is keen to beef up its food operation, but analysts believe it is more interested in parcels of stores than the whole chain.

Separately, the debt rating agency Standard & Poor's placed its rating on Tesco on credit watch yesterday after the supermarket group's surprise decision to announce an intention to bid. S&P said a bid from Tesco for Safeway would "apply further pressure to Tesco's existing weak financial ratios for the current ratings". But it accepted this would be mitigated by the divestment of stores to satisfy competition authorities.

Safeway shares fell 5.5p to 316p. Morrisons dipped 4.5p to 178.5p and Tesco shed 5p to 181p.