Somerfield could be closing the gap with supermarket leaders
STOCK MARKET WEEK
Monday 20 January 1997
It's quite an event for Somerfield: the first offering to the market since its controversial and cut-price flotation last summer.
Twice the share sale price was lowered. To begin with the supermarket chain was thinking in terms of 190p a share. Then it seemed to settle for 160p. But no. It had to go to down to 145p, pricing the group at pounds 435m, to get the sale away. Indeed, the sponsoring investment house, Kleinwort Benson, felt obliged to cover any possible legal comeback by offering Somerfield as a trade sale to other retail groups. There were no takers. Still, its ploy demonstrated 145p was the best price it could get.
Except for an uncomfortable dip in November, the shares have held up in some style. At 170.5p on Friday they are just below their peak.
The flotation flop was in part an unwelcomed legacy from Somerfield's colourful past. A collection of second-line supermarket names - Gateway, International and others - it often seemed to lag the rest of the herd. Eventually it fell victim to a highly geared takeover by a specially created vehicle, Isosceles. The idea was to inject new management and the backing bankers hoped to add to their cash piles by floating the business at considerably above the pounds 2.1bn they splashed out.
But the best laid plans of bankers and men have a habit of failing miserably. The retailing operation was weakened by the sale of 70 superstores for pounds 700m to reduce debt. Even so, the remaining debt burden proved too onerous and to make matters worse the policies introduced by the new management failed to produce the expected returns.
Four years ago David Simons was recruited from Storehouse, where he was finance director, to turn things round.
In the year to last April pre-tax profits were pounds 91.8m and the company was in a position to pay pounds 590.8m in dividends to its banking shareholders, who also swallowed most of the flotation proceeds.
Tomorrow the market will discover whether the Simons style is continuing to produce the growth the old Isosceles operation failed so dismally to achieve.
All the signs are that it has - and Somerfield's long haul to narrow the gap between it and its bigger rivals is still on course.
The nation's number five supermarket chain, which has the largest percentage of elderly customers because of its West Country associations, should, believes NatWest Securities, produce interim profits of pounds 54.5m. Analysts Tony MacNeary and Mike Dennis say such a performance, reflecting thicker profit margins, would "demonstrate clearly that the strategy to close the profitability gap against competitors is on track". For the year they expect an out-turn of around pounds 103m.
Beating Somerfield to the profits punch with half-year figures today is Budgens. Although a relative supermarket tiddler, the company once threatened to join the giants - by bidding for the Dee Corporation from which Somerfield evolved.
Its audacious bid failed. And it was a long while before the group, which in previous incarnations could be found as a confectioner and cake maker, recovered from its endeavours.
But it did and despite being a minnow in the domain of giants it has, in a quiet way, prospered. Interim profits should be about pounds 5m up from pounds 4.3m with year's results 16 per cent higher at pounds 9.2m.
Budgens 100-odd outlets have, so far, managed to hold their own against growing competition from superstores. It is in the forefront of the move for grocers to run garage shops, signing a deal with Mobil Oil.
There is also the intriguing position of German retailer Rewe. It has 29.2 per cent of Budgens and could, if it so wished, increase its holding to 45 per cent by converting bonds.
Speculation about Rewe's intention often floats around. After the failure of a joint venture, running shops under the Penny Market banner, the German group expressed its dismay at the way the operation had been handled.
So the market braced itself for bid action. Or at least a share sale by the disillusioned Germans. But two years after abandoning the Penny Market concept they are still on the share register.
To complete a food retailing week, Watson & Philip, the Alldays convenience chain, produces year's figures on Wednesday. They will be the first since Colin Glass, ex-Dixons, became chief executive.
Paul Smiddy at Credit Lyonnais Laing is around the top end of the range, looking for pounds 20.1m against pounds 18.
Mr Glass had the unenviable task of hitting the market with a profit warning just six weeks after he arrived at the Dundee-based group. He said W&P would not reach the market's more optimistic estimates, prompting many analysts to settle around the pounds 20m mark.
The caution was created by expansion costs at W&P's Foodservice catering supplies businesses. A pounds 1.3m charge for closing unwanted depots was another contributory factor.
The Alldays operation, with 530 outlets, has, like Budgens, linked with a petrol giant - in its case Total. It operates from more than 30 Total garages and there are plans for a further 200-250 forecourt shops over the next three years. All told, the ambition is to build a chain of 1,000 Alldays outlets.
Tesco is scheduled to pronounce on its festive trading tomorrow, with Sainsbury checking in on Friday. The other leading supermarketeers, Asda and Safeway, should also give details of their holiday performances either this week or next.
The market believes the food retailers enjoyed good trading in what, so far, has turned out to be a patchy period, with the likes of Body Shop and Sears having disappointing times.
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