Sir Ian MacLaurin, chairman of Tesco, said he had approached James Millar, his opposite number at Wm Low, two weeks ago. Wm Low has been struggling against fierce competition in Scotland, particularly from discounters, and its sales and profits have been under pressure.
Tesco is keen to expand in Scotland, where its 7.1 per cent market share is well below its national average of 10 per cent, and it sees a takeover of Low as a way of achieving that without adding space in an already crowded market.
That is likely to be equally attractive to Sainsbury, which has just 4.9 per cent of the market compared with more than 12 per cent in Britain as a whole. It said yesterday that it had asked Wm Low for information and was 'considering its position'. Argyll, owner of Safeway - which is already the biggest Scottish chain - ruled itself out of the bidding.
Tesco's offer has been recommended by Wm Low's directors, led by chairman James Millar, who said it 'represents better value for shareholders than the value William Low could achieve as an independent retailer, as the harsher retail food market and our lack of scale limit our prospects for profit growth over the next few years.' He was not available to comment on Sainsbury's statement.
The City had been anticipating interest from Tesco's rivals before Sainsbury showed its hand and Low's shares were quickly marked up from 169p to 236p - well ahead of the 225p Tesco is offering.
Tesco's shares rose 8.5p to 230.5p, while Sainsbury gained 10.5p to 399.5p. The City also saw the bids as evidence that the big supermarket groups are reconsidering their expansion programmes, and are prepared to consolidate through acquisitions instead of opening new stores.
Wm Low has 57 stores, 45 of which are in Scotland, compared to Tesco's 16. Sir Ian said that there was only a 'handful of towns' where both companies had stores, limiting the need for closures. But he admitted that 320 jobs at Low's head office in Dundee were likely to go. Staff will be offered the same redundancy terms as those given to Tesco employees being shed as part of its cost-cutting programme.
Analysts warned that there could be further redundancies as Wm Low has three distribution warehouses in Scotland, and Tesco its own.
Mr Millar said he had 'consistently believed in and worked to maintain Low's Scottish independence'. But competition from discounters and the large multiples was making that increasingly difficult and it had decided its lack of scale was hurting it more than in the 1980s.
The acquisition would give Tesco a presence in towns such as Edinburgh and St Andrews, where it is unrepresented. But it will not help its position in Aberdeen, where Tesco has one store. Wm Low pulled out of the city 30 years ago, after corned beef sold in one of its shops was found to be responsible for an epidemic of typhoid that affected 450 inhabitants, and led to Aberdeen being quarantined. It has never returned.
Wm Low made pounds 21.1m profit before tax on sales of pounds 447m, in the year to September. Sir Ian said Tesco aimed to reverse the sales declines by rebranding the stores Tesco - which it estimates will cost pounds 35m - and offering better quality, cheaper merchandise.
As well as 225p per ordinary share, Tesco is offering 105.5p for Low's pounds 34m of convertible shares and taking on pounds 64m of debt. Low's shareholders have the option of taking Tesco shares.
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