US giant Wal-Mart enters battle for Safeway

Sainsbury says £3.2bn deal could deliver £300m in cost savings

Wal-Mart entered the battle for Safeway today by confirming it was considering an all-cash bid, as the battle for supremacy in the UK supermarket sector intensifies.

The world's largest retailer, which already owns Asda, is thought to be unwilling to stand aside and see its ambition to become Britain's biggest grocer jeopardised by Safeway being taken over by a rival.

Arkansas-based Wal-Mart is the world's biggest retailer and generates annual sales of nearly 220 billion US dollars (£137 billion).

The group conceded any offer for Safeway would be subject to regulatory clearance and that it may have to sell off some stores to satisfy competition authorities.

Asda's president and chief executive Tony DeNunzio said: "We're Britain's favourite supermarket and the number one company for which to work.

"Getting stores in part of the country where we are under-represented means we can meet the pent-up demand of people who want our everyday low prices - 12 per cent lower than the average supermarket."

J Sainsbury made its move yesterday when it announced a possible cash and shares offer for Safeway worth "in excess of" 300p a share. This would value Safeway at £3.2bn and trump the £2.4bn agreed deal between Safeway and William Morrison last week.

Sainsbury's has only made an indicative offer in order to give it room for manoeuvre should Wal-Mart enter the fray. It could then improve the terms of its bid but has asked for more information from Safeway before pressing ahead.

"Everyone is just waiting for Wal-Mart," one analyst said. "The question is whether investors hang around and take the risk of the deals which would be referred [to the competition authorities], or stay with the Morrisons bid, which is the simplest."

It is also considered possible that private equity buyers such as Kohlberg, Kravis Roberts might be interested.

Sir Peter Davis, Sainsbury's chief executive, stressed that he was not simply trying to disrupt the agreed, all-share deal between Safeway and Morrisons. "This is not a spoiling tactic. We would like to buy Safeway," he said. "It is important because it is the last potential reconstruction of any size in this sector." He added that Sainsbury's had been looking at Safeway for more than a year and had been in "active discussions with the board of Safeway and its advisers for the last three months".

It is understood talks broke down before Christmas after Sainsbury's attempted to introduce special conditions to its bid including a "poison pill".

Sir Peter said the deal would "strengthen the number two to put more pressure on Tesco. Nobody's talking about Tesco but they are the dominant player in this industry."

Lord MacLaurin of Knebworth, the former Tesco chairman, said he believed Tesco might launch a bid "if it thought the Competition Commission might give a Sainsbury bid the green light".

He added: "My own view is that the competition authorities would be crazy to allow any of the Big Three to take over Safeway." Tesco is due to make a trading statement today.

Safeway shares soared another 8.5 per cent to 303.5p. Sainsbury's shares dropped 5.5 per cent to 241.5p while Morrisons' shares fell 3 per cent to 185p.

A bid by Sainsbury would be half in cash and half in Sainsbury's shares. It would create a group with 870 stores and combined sales of £26bn. It would have 25 per cent of the UK grocery market, just behind the market leader Tesco. The Safeway name would disappear.

Sainsbury's said it would need to sell about 90 Safeway stores to satisfy local competition issues. Otherwise the combined group would have 39.3 per cent of the market in London, 31.3 per cent in the South and 30.6 per cent in the South-west.

Sainsbury's said its case to the competition authorities would include a pledge to cut prices in Safeway stores. Currently there is a difference of 4.7 per cent, it said. It claimed the deal would give Safeway customers a broader food offer and with access to other services such as Sainsbury's Bank, the Nectar loyalty card and its home delivery service.

The deal would yield synergies of £300m but result in 1,700 job losses and the closure of Safeway's head office in Hayes, Middlesex. Sir Peter said he believed his deal would be more popular with farmers and other suppliers than any bid from Wal-Mart which would give the US group huge buying muscle.

Sainsbury's indicative offer has the backing of the blind trust which acts as trustee for the shares held by Lord Sainsbury of Turville, the former chairman who is now Science minister. Other members of the Sainsbury family, who between them hold 38 per cent of the group, have also indicated their support.

Sir Peter rejected suggestions that Lord Sainsbury might be able to influence any decision by the Department of Trade and Industry.

Sir Ken Morrison, chairman of the Yorkshire-based group, said his deal was "the only one on the table and is recommended by Safeway". He added that "any combination that reduces the national players from four to three would lead to less choice and a risk of higher prices".

Merrill Lynch said: "We think the authorities will see this bid [and any Asda offer] as unacceptably reducing the big four to a big three, and so block it." One broker questioned whether Wal-Mart would want to risk losing. "I'm not saying they're arrogant but they wouldn't want to lose."

The indicative bid overshadowed Sainsbury's third-quarter trading statement which showed like-for-like sales in the 12 weeks to 4 January up 2.8 per cent on last year.