Morrisons hints at further store sell-offs after Safeway takeover

WM Morrison hinted that it might sell off up to 138 additional smaller Safeway stores as it formally launched its £3bn cash-and-shares takeover offer for the country's fourth-biggest supermarket chain.

Shares in both companies soared yesterday, reflecting City relief that the end was finally in sight for a bid battle that has lasted for most of 2003. "The deal makes sense for both parties," one shareholder said.

Morrisons won the vital recommendation from the Safeway board with its 290p-per-share bid, based on last night's closing prices. Its offer comprises one Morrisons share for each Safeway share, plus £636m in cash (60p per share), which it will raise by selling the 52 Safeway stores deemed to pose local competition issues when combined with the Bradford-based group. One Safeway store, in Towcester, Northamptonshire, won a last-minute reprieve and will be retained as part of the bumblebee-coloured Morrisons family.

Sir Kenneth Morrison, the executive chairman, said the revised terms, which give Morrisons' shareholders more of the combined group, reflected the "significant divergence in trading performance" between the two companies since they first unveiled their intention to merge on 9 January. Morrisons' most recent like-for-like sales, excluding petrol, were 8.8 per cent stronger while Safeway's rose by just 0.1 per cent.

Analysts said the bid was disappointingly low, noting that Morrisons' original offer, of 1.32 shares for each Safeway share, would have been worth 302p at yesterday's closing prices. Paul Smiddy, an analyst at Robert W Baird, said: "The offer is at the bottom end of expectations," while Mark Hughes, at Numis Securities, said: "It looks a bit shy of what they should have been able to achieve. Safeway's management clearly didn't believe their own asset valuation." Morrisons' shares rose 3 per cent to 229.5p, while Safeway's shares added 4.75p to 288.5p.

The takeover will create a group with 552 stores, after the 52 store disposals agreed with the regulatory authorities, that will rival J Sainsbury and Asda for the number two slot in the UK supermarket league. The new group will have combined sales of some £12bn.

Although Morrisons intends to retain the Safeway brand for 138 stores trading from less than 15,000 square feet, Bob Stott, the joint managing director, yesterday admitted their future within the new group was not guaranteed. "We have been intrigued by the level of interest received from other operators in stores of this size," he said, adding that the company saw no potential to increase the sales density from these stores.

Both companies are exploring the possibility of implementing the deal via a scheme of arrangement rather than a standard takeover. This would mean Morrisons could avoid paying some £15m stamp duty and could speed up the timetable. However, they must first find out whether they can squeeze themselves into the necessary court diary. Morrisons shareholders will hold about 60 per cent of the combined group, leaving 40 per cent for Safeway shareholders. The deal is expected to yield £215m per year in cost savings by 2008, less than the £250m anticipated last January because the need to dispose of more stores will limit the total economies of scale and reduce buying benefits.

The decision to reclassify Safeway's store portfolio, based on less selling space, means the new group will have 141 "hyperstores" rather than the 192 it identified in January. It will have 195 "superstores", but hopes to expand some of these in due course. The cost savings will cost a total of £165m to achieve.

Sir Ken confirmed that 1,200 Safeway staff would lose their jobs ahead of the closure of the group's Hayes head office.