Morrison bid for Safeway gets boost from regulator

Competition Commission remedies letter deals blow to takeover hopes of largest supermarket chains

The Competition Commission appeared to hand an advantage to William Morrison Supermarkets in the Safeway bid battle yesterday when it said a Morrisons-Safeway merger "could be pro-competitive".

The commission's remedies letter, issued as part of its investigation into four of the bids for Safeway, said the deal could create "a powerful fourth national player to offer competition to Asda, Sainsbury and Tesco".

The news for the other three trade bidders was less good with the commission expressing concern over the longer term impact of any takeover of Safeway by the top three supermarket groups. It said: "The short-term effects might be to intensify competition, but we shall need to consider whether, in the longer term, more dominant positions may be expected to establish a stable hierarchy within which competitive rivalry may begin to diminish."

Safeway shares fell 5 per cent on the receding possibility of an auction. Paul Smiddy, retail analyst at Robert W Baird Securities, said: "It augurs well for Morrisons and points away from Sainsbury's, Tesco and Asda." The fifth bidder, the retail entrepreneur Philip Green, has not been referred to the Competition Commission and is therefore free to launch a bid at any time.

One negative point for Morrisons, chaired by Sir Ken Morrison, was a reference to the difficulty the Bradford-based group might face in successfully absorbing Safeway. "It has been put to us that if Morrison acquired Safeway, it would have to integrate two very different businesses and its success in achieving this while not sacrificing efficiency might be thought uncertain," the remedies letter said. A second was a question as to whether a reduction from five to four competitors locally could be a threat to competition at local level.

Bob Stott, joint managing director of Morrisons, said: "We remain convinced that Morrisons is the best long-term owner of Safeway in terms of customers, suppliers, employees and shareholders."

Sir Terry Leahy, Tesco's chief executive, said: "As we have previously stated, and as the commission notes, the current proposals affecting the future of Safeway raise serious issues as to whether a structural change, which could see the four major retailers become three, should be permitted."

The remedies letter said that non-food ranges would not form part of the commission's decision on the four bids. Internet retailing and petrol retailing have also been deemed to be peripheral. The letter mentioned enforced store disposals as a possible remedy for competition concerns but said any buyer of stores may also need clearance. It added that it would look at whether any of the bids would give the buyer a disproportionate advantage in terms of its ability to obtain new sites and make expansion harder for smaller rivals such as Waitrose, Marks & Spencer or any foreign-owned chains. Land banks (plots ready for development) may also have to be divested as could distribution networks.

Martin Coleman, head of competition at the law firm Norton Rose, said: "I think there is a real possibility of bids being blocked and if they do go for divestments there could be some very tight conditions."

The inquiry is also looking into whether promised price cuts for consumers would be sustained, and the success, or otherwise, of the existing Code of Conduct with suppliers. The letter said approval of any bid for Safeway should be conditional upon a strengthening of the Office of Fair Trading's code governing relations between the successful bidder and its suppliers.

Safeway shares closed 13p lower at 260p. Morrisons and Sainsbury's also saw their shares fall, though Tesco stock edged 2.5p higher at 211.5p.

The commission is due to report its findings on 12 August.