$10.8 BILLION BID FOR U.K.'S ASDA MADE BY WAL-MART

JAMES FALLON

LONDON (FNS) -- Wal-Mart Stores last week changed the face of European retailing.

The U.S. retail behemoth unveiled a $10.81 billion (6.72 billion pound) bid for Asda plc of Leeds, England, Britain's third-largest food retailer, an offer that created wide speculation about an acceleration of international food retail mergers.

The transaction would double the size of Wal-Mart's international operations to sales of about $25.5 billion (15.8 billion pounds) from the current $12.2 billion.

Wal-Mart currently operates 726 stores in eight countries outside the United States. Its only European operation is in Germany, which it entered in 1997 and where it operates 95 stores.

Analysts and industry observers predicted the proposed deal will set off a flurry of similar acquisitions and mergers across Europe as companies both large and small struggle to compete against the world's biggest retailer.

"This marks a big turning point in European retailing across the board," said Richard Hyman, chairman of London-based consultant Verdict Research Ltd. "It definitely will quicken the pace of other mergers and acquisitions across all the big hitters of Europe."

Immediately after Wal-Mart announced the Asda bid, analysts began a frenzy of speculation about which companies would be next. Wal-Mart's sheer size -- its sales of $137 billion last year are almost four times that of Europe's largest retailer, Metro AG -- means retailers have no choice but to combine or get submerged in Wal-Mart's wake.

"Companies such as Tesco, J. Sainsbury, Carrefour, Promodes, Delhaize, Metro and Ahold all have to be feeling vulnerable right now," one analyst said. "At least they're big enough to do something about it."

Observers predicted possible combinations among these players, as well as a string of mergers and acquisitions among smaller retailers throughout Europe. Ahold already has said it wants to boost its European operations and there has been speculation it might bid for Sainsbury or Safeway plc of the United Kingdom. Meanwhile, there have been reports that America's Kroger Co. and the investment company Blackstone Group are eyeing a possible takeover of Safeway.

Safeway officials last week declined to comment on the reports. Nor does Wal-Mart's proposed purchase of Asda mean it's finished shopping, analysts said. They said they believe Wal-Mart's goal is to be in every major European market and this will mean it's bound to buy other retailers in years to come.

"They're going to have to make a bid for Carrefour at some stage so they can get into France," Hyman predicted.

Donald D. Soderquist, Wal-Mart's senior vice chairman, last week declined to forecast more acquisitions. But Wal-Mart executives -- who several weeks ago were bluntly stating they had no plans to enter the United Kingdom -- didn't rule them out either.

"We haven't decided what our next market will be," said Jay Fitzsimmons, the company's treasurer and senior vice president of finance, who negotiated the Asda deal. "What this [the proposed Asda purchase] does is give us a presence in two of the three European Union markets with the largest consumer spending."

Fitzsimmons added that Wal-Mart still has some work to do in Germany to get those stores up to speed. The company is investing heavily in systems and logistics in Germany. But while some Wal-Mart executives have predicted the German stores would be rebadged Wal-Marts by the end of this year, Fitzsimmons was more cautious last week.

"We won't badge those stores Wal-Marts until they're up to being Wal-Marts," he said, adding he didn't know when this might be.

Ironically, in the same week that Wal-Mart accepted the resignation of its long-time president of international operations, Bob Martin -- to be succeeded by John Menzer, Wal-Mart's chief financial officer -- Fitzsimmons said one of the main factors in the retailer's proposed acquisition of Asda was the strength of its management team.

"One of the things that causes us pause is that if you look at the resources we ration most within Wal-Mart, it's international retail talent," he said. "Had Asda not been management accretive we would not be here today."

Wal-Mart also would have been unlikely to bid had it not been for a rival $9.43 billion offer for Asda from Kingfisher plc in April, which would have created one of Europe's largest retailers, with operations ranging from food and apparel to beauty products and consumer electronics. Analysts had speculated at the time of the Kingfisher bid that Wal-Mart might come in with a higher offer but this appeared less likely as time passed and as Wal-Mart executives downplayed the possibility of the retailer entering the British market.

"Kingfisher obviously caused us to focus on the opportunities in the U.K.," Fitzsimmons said. "We're here today because of that."

The Wal-Mart bid was recommended by the Asda board and is likely to be completed within five or six weeks.

The Wal-Mart bid was recommended by the Asda board and is likely to be completed within five or six weeks.

Wal-Mart has no plans in the short term to rename the Asda stores or to change the company's management, Soderquist said. But Asda has plans to open 10 to 12 stores a year over the next three years and some of these could be called Wal-Marts, executives indicated. Analysts also said they believe that in time Wal-Mart would rebrand all Asda's stores as Wal-Marts.

Soderquist said the main factor that clinched the offer was the similarity of cultures between Wal-Mart and Asda.

Asda had an operating profit of $706.3 million (436 million pounds) on sales of $13.28 billion (8.19 billion pounds) in the year ended May 1. It operates 229 stores nationwide and has built its reputation on low prices.

Executives attending a press conference in London last week to announce the bid included Soderquist, Leighton and Archie Norman, Asda chairman.