FATE OF SAFEWAY U.K. IN HANDS OF BRITISH OFFICE OF FAIR TRADING

Samantha Conti

LONDON -- For the next two months, all eyes in the U.K.'s food retailing industry will be locked on Britain's Office of Fair Trading, which is to decide who moves forward -- and who gets left behind -- in the battle for control of Safeway supermarkets.

As reported, a bidding war for Safeway -- which represents the last major chunk of supermarket real estate in a fiercely competitive market -- erupted last week when Wm Morrison Supermarkets made an offer valuing Safeway at about $4.1 billion.

That move instantly sparked a bid by J. Sainsbury valuing Safeway at about $5.04 billion, and the promise of an all-cash bid by Wal-Mart/ASDA for the chain.

Safeway is viewed as attractive because of its strong presence in northern England and Scotland, its 10% market share, and its 480 stores in a country where obtaining planning permission for new stores is difficult.

Over the next six to eight weeks, the OFT will decide whether to recommend -- or reject -- bids by Wm Morrison Supermarkets, J. Sainsbury and Wal-Mart/ASDA for Safeway.

Wm Morrison is the smallest of the three bidders, with sales of $6.27 billion, and would clearly pose fewer -- if any -- problems for anti-trust authorities.

"Logic would dictate that the Wm Morrison bid would be automatically approved, and that the Wal-Mart/ASDA and Sainsbury bids would be referred by the OFT to the Competition Commission for anti-trust concerns, because of their size," said Andrew Fowler, an equities analyst with Merrill Lynch in London.

If Wm Morrison's bid were to be approved, and the other two bids sent to the Competition Commission for a final examination, it would then be up to Safeway shareholders to make a decision: Either grab Morrison's sure, but more modest bid, or take a gamble that the other two offers would eventually be approved.

Fowler described the climate in the supermarket industry as desperate. "The [bidders] believe it is now or never to gain this market share and you never win a lottery without buying a ticket," he said.

Tony De Nuzio, president and chief executive of ASDA, the U.K.'s third largest retailer and part of the Wal-Mart empire, last week said his ambition is "getting stores in parts of the country where we're under-represented."

"We believe Wal-Mart/ASDA has the most to lose from an unsuccessful bid for Safeway," said Richard Hyman, chairman of the London-based Verdict Research. "If Wm Morrison buys Safeway, then we'll see 10 million-plus square footage of space move from the quality segment to the value segment of the market, which is Wal-Mart's area.

"If Morrison is successful, it would grow by three times and overtake Wal-Mart/ASDA's bid to go head-to-head with Tesco. If Sainsbury wins, the square footage will remain in the quality sector, but Sainsbury will also overtake Wal-Mart/ASDA in the rankings. Either scenario is bad news for Wal-Mart."

The competition issues arise from the British government's investigation 18 months ago into competition in food retailing. It eventually ruled that the sector was, indeed, competitive.

However, the government has been monitoring the sector ever since, and it's clear that if Wal-Mart/ASDA were to grab Safeway, a market duopoly would arise dominated by that store and Tesco, which is currently the leader in supermarket retailing.

Fowler ruled out both Tesco and Marks & Spencer as probable bidders. Tesco, he said, is considered to have a near-scale monopoly already, while M&S does not have the economies of scale to take on a chain such as Safeway.