Tesco enters bid battle for Safeway

Market leader's surprise move may be a spoiling tactic to prompt competition inquiry

The £3Bbn bid battle for Safeway became a six-way fight yesterday when Tesco said it was considering making a cash and shares offer.

The surprise move by the UK market leader was labelled a "spoiling tactic" by some observers though the company insisted it was serious.

Sir Terry Leahy, Tesco's chief executive, said: "We've been watching the situation carefully and preparing our submission. The competition authorities are being asked to consider a major restructuring of our industry from four big players to three. We believe our case should be heard."

Tesco believes the existing guidelines on competition policy would block a move from four big supermarket groups to three. But with its archrivals J Sainsbury and Asda already working on bids, it has decided it can no longer stand on the sidelines.

Tesco reckons it would be allowed by the competition authorities to keep about three-quarters of Safeway's 480 stores, selling the other 130. If successful it would rebrand all Safeway outlets under the Tesco name and introduce Tesco prices, which it claims are 11.7 per cent cheaper.

However, even with these disposals Tesco's share of the UK grocery sector would rise from 26 per cent to about 33 per cent.

Retail experts believe Tesco's chances of success are remote. "They always thought it [a successful bid for Safeway] was a million to one shot," one analyst said. "But if the principle is going to be debated they might as well put an offer forward."

Competition lawyers were also sceptical. Chris Bright, of Shearman & Sterling, said: "I suspect this is just a way of getting a seat at the table."

Some experts felt Tesco's move could help the case of the financial bidders, the buyout specialist Kohlberg Kravis Roberts and the retail entrepreneur Philip Green. "The arguments have centred on the problems of going from four big players to three," one analyst said. "So if you come along with cash and say you are going to run it [rather than break it up] you're in quite a strong position."

Tesco joins William Morrison, J Sainsbury, Wal-Mart/Asda, Philip Green and KKR on the list of Safeway bidders, though so far only William Morrison has tabled a formal bid.

Sir Ken Morrison, Morrisons' chairman, said yesterday: "It does not surprise me that Tesco is joining Wal-Mart/Asda and Sainsbury in pursuit of Safeway. It further reinforces our view that the combination of Morrisons with Safeway will create a highly effective competitor for the big three national food retailers which they are all busy attempting to thwart." He said a financial bid was likely to lead to a break-up "either now or later."

Tesco has suspended Merrill Lynch as one of its joint brokers as it had a conflict of interest after its decision to act for Mr Green. The suspension is for the duration of the bid.

Tesco plans to submit its case to the Office of Fair Trading though a referral to the Competition Commission is seen as a near-certainty.

Mr Bright, at Shearman & Sterling, said: "The bid frenzy shows the importance of the assets and tells you the competition story."

Vince Cable, the Liberal Democrat trade spokesman, called for any takeover to be referred to the Competition Commission. "After a fortnight of unsightly scrambling by food groups to get in on the act, shoppers and suppliers would be best served if there was an immediate reference to the Competition Commission," Mr Cable said.

David Webster, Safeway's chairman, is due to meet Downing Street officials next week to discuss the bid battle and the potential changes to the competitive landscape in UK food retailing. The increasing power of the major supermarkets is a sensitive issue as farmers and other suppliers fight for survival. The Safeway bids will be decided by the OFT, the Competition Commission and ultimately the Department of Trade and Industry.

Safeway shares fell 2.5p to 321.5p. Tesco shares dipped a penny to 186p.