US private equity group KKR first to abandon the chase for Safeway

Kohlberg Kravis Roberts dropped out of the six-way race to buy Safeway yesterday after deciding the £3bn-plus deal was too big a risk. The US buyout specialist, which has also been linked with a white-knight bid for Six Continents, said it had "decided for the time being not to continue its potential offer for Safeway any further".

However, KKR said it would "continue to monitor the situation" and did not rule out coming back at a later stage depending on how the Office of Fair Trading rules on the other bids.

It is understood KKR felt it had insufficient information on Safeway's current trading to justify pressing ahead. It was also worried about suppliers' reaction to the bid and Safeway's "high-low" pricing strategy.

It is thought KKR found no "black holes" in Safeway's accounts and that the problems were more related to price and the level of information available.

Another issue was that KKR's offer would have been investigated by the European Commission rather than the OFT because of the scale of KKR's European interests. Under European takeover rules, this would have meant KKR would have had to make a formal bid, rather than the indicative offers allowed by the OFT.

One source close to the bid battle said: "It was always going to be difficult for a trade buyer to afford much more than 300p per share. They don't have the same synergies as a trade buyer."

Safeway shares fell 5p to 305.25p as the number of potential bidders was reduced to five.

Paul Smiddy, a food retail analyst at Robert W Baird Securities, said: "I'm not terribly surprised [that KKR has dropped out] and it highlights that it will be difficult for Philip Green too."

But Mr Green said he was still pressing ahead with his plans. "We carry on where we were," he said. "We are going through the [regulatory] process and then we'll make a decision."

One analyst pointed out that Mr Green is not bound by the same financial performance targets as KKR and has said he has identified a management team he could put in place at Safeway. He would also have some synergies as he would be able to push some Bhs merchandise through the Safeway stores.

So far only William Morrison Supermarkets has made a formal bid. J Sainsbury, Wal-Mart/Asda, Mr Green and Tesco have made indicative bids that are being scrutinised by the OFT. The OFT is expected to rule on the bids by the end of March.

Separately yesterday, Morrisons shareholders approved the company's bid for Safeway at an extraordinary general meeting. "We have clear plans for Safeway," the group's chairman, Sir Ken Morrison, told the meeting. "The strength of Morrisons' retail offer, our tight cost control and benefits of scale will transform Safeway's performance."

Morrisons' all-share offer values Safeway at 215p a share, well below the current Safeway price. Morrisons received acceptances from 0.67 per cent of Safeway shareholders at the first closing date for its bid on Friday.

Sir Ken said KKR's withdrawal improved his company's chances of success. "It's one less [bidder] isn't it? We move up the betting order don't we?," he said.

Morrisons has been seen as the rank outsider in the battle for Safeway. But many commentators say Morrisons may emerge as the favourite if the other supermarket bids are blocked. Wal-Mart is regarded as the likely winner if the competition authorities allow it.

Some analysts said further falls in Safeway's share price would strengthen the hand of Mr Green as it would bring the company more within his reach.