Somerfield to cut costs and sub-let store space

Somerfield, the supermarket group which turned down a £510m takeover approach last month, yesterday unveiled a strategic review that will see it sub-let some of its selling space to other retailers, cut costs by £100m and push ahead with a refurbishment programme.

The company also gave details of a property re-evaluation of its retail estate, saying the value was £250m higher than the figure stated in its books. The upgrade makes Somerfield's net assets worth £1bn, or 210p per share. This is well ahead of the 120p per share offer from John Lovering and Bob Mackenzie, the two entrepreneurs who had wanted to take the company over and sell a group of the stores to J Sainsbury.

Somerfield shares jumped 5.25p to 127.5p with 44 million shares traded. The volume was so heavy that there was speculation of a fresh bid for the company. It is understood Baugur, the Icelandic retailer embroiled in a takeover battle for Hamleys, was increasing its holding. It already holds more than 3 per cent of the shares.

Though the trading figures provided for Somerfield and Kwik Save were still lacklustre, analysts were positive on the strategic overview.

Paul Smiddy of Robert W Baird Securities, said: "They have delivered what was expected in terms of property, cost-cuts and they are displaying a lot more confidence in the Kwik Save re-launch. Most of the building bricks are in place. It looks quite re-assuring."

John von Spreckelsen, Somerfield's chairman, said he was confident the business would now start to improve but declined to comment on whether Mr Lovering and Mr Mackenzie might come back with another bid. "I don't know," he said.

As a result of the review, Somerfield will let out space in about 50 of its largest stores, which it believes are too big. Space in six sites has already been let to Peacocks, the discount retailer, which coincidentally is chaired by Mr Lovering. Other partners are likely to include DIY retailers and Blockbuster, the video rental chain.

Separately, a refurbishment programme is being accelerated, which will see 10 branches upgraded this year at a cost of £70m.

At Kwik Save, some of its smaller stores are to be extended while space in some of the largest stores is to be let out to other retailers such as Poundstretcher.

Kwik Save will also devote mores space to fresh food as this is generating significant sales uplifts in the 14 trial stores currently operating. Around 50 Kwik Save stores will be upgraded by December at a cost of £35m.

Other moves include a bigger push into adding stores to petrol stations. Somerfield has 18 convenience stores on TotalFinaElf sites so far but believes there could be scope for up to 100 over the next three years. An additional partnership is being formed with TM Retail to test six stores, which will traded under a joint Somerfield-Martins newsagent fascia.

The plans came as Somerfield announced operating profits of £30m for the year to April, up from £28m the previous year. Pre-tax profits jumped to £34m, although they were boosted by lower interest charges and reduced exceptional charges. Somerfield now has net cash of £2.5m.

In the year to 26 April group like-for-like sales rose by 1 per cent on the previous year.

In the first nine weeks of the current year underlying sales growth is 1.1 per cent at both the Kwik Save and Somerfield formats.