Safeway and Asda forced to abandon pounds 9bn merger plan

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Safeway and Asda were yesterday forced to abandon talks about a pounds 9bn merger after news of the discussions leaked and it became apparent that the deal would probably have been blocked by competition authorities.

Michael Harrison reports on the deal that never was and the recriminations that have followed.

Plans to create Britain's biggest supermarket group were shelved last night after Safeway and Asda said they had discontinued exploratory discussions.

A merger between the two would have created a supermarket giant with 15.3 per cent of the UK's pounds 85bn-a-year food retailing market, 600 stores and 125,000 employees, outstripping Tesco and Sainsbury in size.

But Safeway and Asda abandoned talks after news of their discussions emerged in the weekend press. The two companies said they had been prepared to proceed only if the talks remained confidential and the deal was not referred to the Monopolies and Mergers Commission.

But observers said last night that the chances of the deal escaping a referral had already been slim and became non-existent after the premature disclosure of the talks.

Safeway's chief executive, Colin Smith, approached Asda's chairman, Archie Norman, and chief executive, Allan Leighton, about a possible merger in April. The two companies submitted a joint proposal to the Office of Fair Trading in July and had been due to receive confidential guidance in the next few days on whether the deal was likely to be referred.

The President of the Board of Trade, Margaret Beckett, is understood to have been aware of the merger talks but her office had received no formal recommendation from the OFT. However, Mrs Beckett, now referred to in some quarters as Mrs Blockit because of her tough stance on mergers, is thought unlikely to have approved it without an MMC investigation.

The merger would have produced savings of about pounds 200m a year through the combination of purchasing, information technology and marketing budgets and there would have been in the region of 1,000-1,500 one-off job losses.

The rationale behind the merger was to have been to create a third force in the UK supermarket capable of taking on the two market leaders, particularly in the South-east, where Tesco controls 70 per cent of the superstore market. Asda has an ambitious pounds 260m plan to double its chain of hypermarkets with 13 new openings by 1999.

Last night conflicting accounts of how the merged group would have been put together and operated were emerging, however. The Safeway camp said it would have been a merger of equals to create a joint stock company. Safeway is capitalised at pounds 4.3bn while Asda is valued at pounds 4.9bn. No decisions had been made on who would run the combined operation, whose head office would close and which brand name would be retained.

But the Asda camp said it had been approached on the basis that it take Safeway over. There was no question of it being a joint stock company, Asda would have led the merger and Mr Leighton would have been the chief executive. In a memo sent to Asda's 42 general managers yesterday, Mr Leighton stressed it had always planned to remain separate. "We did have some discussions starting a few months ago because we felt it would be interesting to explore what Safeway had to say," he wrote. "We were not then and we are not now looking for another company to join with."

Supporters of the merger say it would have enhanced competition because Tesco, with 15 per cent of the market, and Sainsbury, with a 13 per cent share, would have had a powerful rival able to cut costs and pass savings onto customers. But it was said that the disclosure of the talks made it impossible for the two sides to continue discussions given the damage that could have been done to staff morale, customer loyalty and relationships with suppliers.

Reports that Safeway had earlier approached Marks & Spencer or that it might seek to link up with a US retailer were strongly denied but observers said it might now seek to buy a smaller chain.