Four of the five bidders for the UK's fourth largest supermarket group have had their offers referred to the Competition Commission, it was revealed yesterday, one more than had widely been expected.
Patricia Hewitt, the Secretary of State for Trade and Industry, decided to refer the proposed bids from Asda, Sainsbury and Tesco, but surprised analysts by also deciding to refer the bid from Morrisons. Since the Yorkshire food retailer is smaller than Safeway, its bid - the only one actually on the table at the moment - had been expected to be approved with a few simple conditions.
The fifth potential bid, by Trackdean Investments (the bidding vehicle of entrepreneur Philip Green) has not been referred, since Green has no supermarket interests.
Hewitt said that the decision was in line with the recommendations of the Office of Fair Trading, which has been reviewing the proposed offers for Safeway. "I have decided to accept the advice of the OFT in these cases. I have therefore decided not to refer the bid from Trackdean Investments, after the OFT advised that the merger raised no competition concerns.
"However, it concluded that, in the cases of Tesco, Sainsbury and Asda, there is a significant prospect that these mergers may be expected to result in a substantial lessening of competition. Moreover, it also concluded that there are reasonable grounds for believing that there will be the same outcome in the case of Morrison. In light of this advice I have decided to refer these four bids to the Competition Commission for an in-depth inquiry."
The OFT advised that the mergers raise competition concerns in respect of the market for one-stop grocery shopping in stores greater than 15,000 square feet. The OFT concluded that at a local level, the loss of competition between Safeway and any of the four largest existing grocery retailers in certain areas appeared to be substantial.
There would be additional competition concerns at the national level as well, the OFT said. The acquisition of Safeway by Asda, Sainsbury or Tesco would lead to a significant increase in concentration, with Asda, Sainsbury and Tesco together supplying over 85 per cent of all one-stop grocery shopping, it said. In the case of Morrison, the OFT concluded that the merger seemed unlikely to raise additional competition concerns over and above the effects at local level.
The bad news for Safeway is that this decision means the question of its new ownership will now be dragged out for a further six months, with the Competition Commission given until 12 August 2003 to make its report. The company said in a statement that it would co-operate fully with the Competition Commission's investigation and that it remained "fully committed to achieving an outcome which is in the best interests of shareholders, the business and our employees".
For its part, Tesco said that it would "engage constructively with the Commission and work to secure the best outcome for the consumer". Chief executive Sir Terry Leahy said he was not surprised by the decision, as competition policy limited consolidation of the four national players in the industry.
"As we expected, the authorities will now look at the implications of major structural change including the possibility of consolidation from four national players into only three. If the four national players are to be restructured into three, we believe consumers would be better off if Tesco led that change."
Tesco also expressed concern, somewhat dubiously "on the part of consumers", that the government's decision might allow a financial bidder to buy Safeway and then break up and sell on parts of the business. "Any such move should be subject to prior government clearance in the normal way - and there should be a reference to the Competition Commission if it seems likely to lead to a four into three consolidation by the back door," Leahy said.
Sir Peter Davis, Sainsbury's group chief executive, was equally disappointed that the decision as to who would be allowed to bid for Safeway would not be taken for six months, but added that the company "will co-operate fully with the Competition Commission and look forward to a satisfactory conclusion. We believe a combination with Safeway would offer more customers greater choice and a superior food proposition."
But when the Commission makes its final report in August, there may already be fewer bidders for the company. Morrisons, the only company which had made a formal bid for Safeway, said that that bid had now lapsed as a result of the government's decision, and that it was now considering its options.
"Morrisons is disappointed that the OFT found difficulty in identifying and addressing the local areas of overlap between Morrisons and Safeway. Morrisons had indicated to the OFT its willingness to undertake store divestments, where required, to address any local competition concerns," the company said.
"The statement today is very disappointing as we believe our offer for Safeway would have enhanced competition and created a strong fourth national food retailer. Morrisons is the only combination with Safeway which can generate strong competition at a national level securing a better deal for customers and fair treatment of suppliers."
Asda's owner Wal-Mart asid in a brief statement that it was "looking forward to co-operating fully with the Competition Commission. We havea strong case for being allowed to buy Safeway, which we will pursue vigorously."
Philip Green's Trackdean company has yet to comment on Hewitt's decision.