View from City Road: Wm Low in supermarket hot seat

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The Independent Online
Still remembered in Aberdeen 30 years after the event as the company whose tinned corn beef caused a horrific outbreak of typhoid, William Low finds itself the hottest property in Scotland, wooed not just by Tesco but by Sainsbury too.

The cause is far from flattering, however. If there was any lingering doubt that Britain has too many supermarkets, the sight of these two giants from south of the border limbering up for a fight over a struggling Scottish operator should dispel it.

Tesco clearly believes that buying Wm Low's stores is a far better way of establishing itself in Scotland than outbidding rivals and fighting planners for sites, only to add yet more space in an already competitive market. J Sainsbury's uncharacteristically aggressive response suggests it agrees. Asda and Argyll would doubtless jump at a similar move if they could find such a perfect geographical fit.

On the face of it Sainsbury could easily afford to up the stakes. Even allowing for a generous pounds 50m of redundancy and rationalisation costs, bringing the total cost including rebranding and debt to pounds 300m, Tesco is picking up 57 stores for less than it would cost to build 25. True, the price represents 14 times estimates of earnings for the current year, but that falls to just eight times peak earnings in 1991, when sales and space were both more than 10 per cent lower.

Even if Tesco manages to lift Low's margins by only half the difference between them, operating profits would be 12 per cent higher. Given that Sainsbury already beats Tesco on margins, return on capital and sales per square foot, its potential upside should be that much higher.

There is no guarantee that Sainsbury, which to enter the fray will have to shrug off its aversion to contested bids, will remain in the race. But even if it doesn't, that would not necessarily mean takeover activity in the sector would end. Ken Morrison, chairman of Wm Morrison, still seems determined to hand the business on to his son but he may eventually decide it is worth swapping the family's 38 per cent stake for a quieter life. Kwik Save and Iceland both offer an attractive network of town centre stores.

None of these have Wm Low's trading problems, nor its geographic niche, which makes them less attractive to predators from within the industry. The amount of cash that supermarkets throw off might none the less make them attractive to those outside the sector, who might not feel such a macho need to expand space. The 27 per cent fall in the sector since the beginning of 1993, leaving it at a 20 per cent discount to the market, has made it that much cheaper. Perhaps the rumours about Hanson eyeing Safeway owner Argyll are not so far-fetched after all.