Safeway prepares for bid from Asda

Safeway was on bid alert last night as speculation persisted that the rival supermarkets group Asda was considering launching a hostile takeover. A merger of the two companies would create Britain's biggest supermarket chain. Michael Harrison reports.

Rumours swept the market yesterday that Asda was raising a large amount of bank debt in readiness to strike for Safeway. An Asda spokeswoman categorically denied that the group was putting together a debt facility. But Safeway and its financial advisers were still said to be ready to mount a vigorous bid defence.

Talks about a pounds 9bn merger of the two companies collapsed in September after news of the discussions leaked and it became apparent that any deal would almost certainly have been referred to the Monopolies and Mergers Commission.

A merger between the two would create 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.

At the time of the abortive merger talks, Safeway said a combination of the two groups would produce savings of about pounds 200m a year through the combination of purchasing, information technology and marketing budgets. There would also be in the region of 1,000 to 1,500 job losses.

The rationale behind the merger would be 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.

However, a hostile bid would still be fraught with complications. Archie Norman, the Asda chairman, is deputy chairman of the Conservative party. The President of the Board of Trade Margaret Beckett has gained a reputation for blocking mergers which reduce competition and is thought almost certain to refer any Asda-Safeway deal to the MMC.

Since the collapse of the merger talks Safeway has slipped in value from pounds 4.3bn to pounds 3.7bn while Asda's stock market capitalisation has grown from pounds 4.9bn to pounds 5.2bn.