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 Wednesday, 22 January, 2003, 18:37 GMT
Safeway bidding: Off the trolley?

UK retail giant Tesco has joined the bidding frenzy for UK supermarket chain Safeway, but does the bid make any sense?
At first glance it seems absolutely bizarre. Tesco's potential bid for Safeway looks like it doesn't have a snowball's chance in hell.

Tesco already is the UK's biggest supermarket, and with 27% of our grocery shopping in its basket, it's nudging the limit that sets off the alarm bells at the competition watchdog.

The fair trade authorities don't like it when one firm corners more than a quarter of its industry - and a takeover deal that gives a company more than that will get pulled in for inspection.

Add Safeway's 10% of the grocery market to Tesco's share, and you're well over that limit. A deal between the two wouldn't just drive a coach and horses through the regulations; it would send a mega-ton delivery lorry through them.

How serious is Tesco?

But bids like this are not cheap. And Tesco is spending some credibility on it - describing its likely offer as "serious" and "compelling". It wouldn't launch a bid like this if it didn't have a plan.

So what is it?

Only Tesco's bosses know for sure - but it looks like they are preparing for the end game.

They are betting that the bidding war for Safeway will spark a fair trading enquiry into the whole supermarket business, and they are booking their seats at the table for the final carve-up.

So much interest, so few offers

Six bidders have now said they want to buy Safeway, but there is still only one formal bid on the table - that's the offer from Morrisons.

The all-share, no-cash bid is worth less now than on day one - the fall in Morrisons share price has cut its value from 2.9bn to about 2.5bn.

That is much less than the other big supermarkets are expected to put on the table - Asda's US owner Wal-Mart could put down as much as 4bn.

But experts say the Morrisons deal has one key attraction for Safeway shareholders - it is unlikely to be blocked by the watchdogs.

Tesco arithmetic

Don't be so sure.

Some say putting Morrisons and Safeway together is the dream solution for the watchdogs.

It would create a new fourth force in UK supermarkets - and give Tesco, Sainsbury and Asda a stronger run for their money.

But in some parts of the country, putting them together wouldn't create a fourth force - it would create a giant.

According to retail experts Taylor Nelson Sofres, Morrisons and Safeway between them capture 29% of grocery shopping in Yorkshire and 31% of the market in the north east of England.

In both parts of the country, a merged group would be the biggest supermarket chain by far.

By contrast, the Tesco and Safeway combination would only have 24% in both regions - well below that 25% threshold.

And we know the watchdogs keep a close eye on the regional tallies, as well as the national figures.

The break-up option

If the watchdogs look beyond the simple UK-wide figures, they can find a reason to block ALL these bids - from Asda, Sainsbury, Tesco and Morrison.

That increases the chances of a full-blown enquiry, and an eventual break up of Safeway.

If any of the supermarkets wins the battle - and that's a big if - the chances are high that it will have to sell off some stores.

By talking about a bid - even one that appears to have no hope - Tesco can now get the competition authorities to tell it how many Safeway stores it could be allowed to buy - and where.

This is now set to be one of those landmark takeover battles - a rare contest that will change forever one of our biggest industries.

And all the big players are now in position.

For some of them, this is the last chance to get round the planning laws that stop new superstores, and expand their business quickly.

The others have to halt their rivals in their tracks.

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