Somerfield and Kwik Save shares soar amid rumours of rival bid

SPECULATION was growing last night that a rival bidder may enter the fray for either Somerfield or Kwik Save as the two supermarket companies confirmed their pounds 1.4bn merger. Shares in both firms soared amid rumours, largely discounted, that Sainsbury's might make a move for Somerfield and that Safeway might be interested in the combined group.

Analysts were dismissive of the rumours but were struggling to explain the reason for the 15 per cent increase in the share prices of both companies yesterday afternoon.

Somerfield shares jumped 38p to a new high of 299p. Kwik Save shares put on 44.5p to 343.5p even though the merger details included a Kwik Save profits warning.

However, it is thought that the main reason for the increase was heavy buying of Somerfield shares by value funds in the United States, where more than 40 per cent of its stock is now held. One US broker did $10m (pounds 6.1m) of trading in Somerfield stock in the first hour of trading. The shares started to rise as soon as the New York market opened.

It is highly unlikely that any of the big supermarket groups would be interested in either Somerfield or Kwik Save. They were all offered the chance to buy Somerfield at 165p per share in August 1996 when Kleinwort Benson was struggling to float the company on the stock market. Kwik Save has severe problems and a weak store portfolio.

Paul Smiddy of Credit Lyonnais Laing added: "The share movements are astonishing. I would have thought that most of the industry would be quietly laughing at this deal. The management task is enormous."

Most analysts remain underwhelmed by the "nil premium" merger because they feel that the fundamental problems of weak brands, poor store portfolios and slow sales growth will remain.

Somerfield yesterday confirmed more details of the merger. It will be effected by a share-for-share exchange, with Kwik Save shareholders receiving seven Somerfield shares for every six Kwik Save shares held. Somerfield shareholders will hold 62.5 per cent of the enlarged group with Kwik Save holding the remainder.

The company will initially be called Somerfield though a new name is being considered. A new, independent chairman is being sought, though Simon Keswick, Kwik Save's chairman, will fulfil the role in the short term.

Kwik Save's head office in Prestatyn, is earmarked for phased closure, threatening 800 jobs. Further jobs could go at the 120 stores which overlap in the two groups' portfolios. Cost savings of pounds 50m a year are expected.

Somerfield will hold the whip hand on the new board with eight of the 15 places compared to Kwik Save's six. David Simons of Somerfield will be chief executive with Kwik Save's Phil Smith acting as deputy. Martin Gatto, Somerfield's finance director, will take the finance role in the enlarged company.

There is one new appointment with Simon Hughes, the former head of Mothercare, joining as supply chain director.