It is the deal that one analyst quips has taken longer than Lord of the Rings to conclude. And in the end, only one official bid made it to the table.
But the £1.082bn offer from the Apax Partners/Barclays Capital/Robert Tchenguiz consortium, which now also includes the largest Icelandic bank, Kaupthing Bank, has received full backing from the Somerfield board. And next month shareholders will decide if the company is to transfer into private ownership.
So what lies in store for the UK’s fifth largest grocer if the bid is successful?
When chairman John von Spreckelsen and a new management team came on board in 2000, they wasted no time overhauling the 1,300 store estate and its IT and supply systems. The consensus is that they’ve done a pretty good job, despite Kwik Save being an ever-present thorn in their side. At the start of the bidding contest, shareholders were holding out for as much as 205p per share.
Unfortunately, that wasn’t to be. In the nine months since Baugur reignited the fight with a 190p per share indicative offer, all the other bidders apart from Apax and friends, which initially included Baugur, have pulled out of the race.
Meanwhile, the retail sector has slowed dramatically and Somerfield has suffered an unexpected knock-back when the Competition Commission told it to sell 12 of the 114 former Safeway stores it bought from Morrisons last October.
Despite this, von Spreckelsen says that the price reflects the group’s progress since he took over the reins in 2000. “Over the past five years, Somerfield has made good progress in its recovery programme in an increasingly competitive retail environment,” he says.
Now it is down to John Lovering, who will replace him, to build on that. Clearly, as far as the consortium is concerned, the deal is very much a property play and the returns will come as much from how it works the portfolio as from introducing new operational efficiencies. However, in terms of the retail business itself, the early signs are positive. If shareholders agree to the deal, it is reported that the consortium will initially throw £300m into the pot to cut prices further and speed up the store refurbishment programme.
Shore Capital analyst Clive Black adds: “It seems the board will initially be allowed to carry on as they are. The company is well run at the moment in a difficult trading environment, but it is hard work just to stand still. The consortium obviously sees opportunity in the company and you have to respect that.
“There will definitely be a lot of store disposals, particularly the Kwik Save brand. It’s been a major problem for the group and one that has to be rectified sooner rather than later.”
However, not all shareholders are happy with the price. RW Baird is waiting to see the deal laid out in full on November 4 before making a decision on how good it really is.
At the moment, retail analyst Paul Smiddy is sceptical. “An auction never happened and Apax Partners are very aggressive purchasers, so we have ended up with only one offer on the block. I don’t think this is a good deal. It will be interesting to see why the board has supported it - what will it enable them to do that they couldn’t do before?
“Somerfield is a relatively sound business and doesn’t need emergency surgery. It does not need to take this deal.”
He adds: “It’s been suggested that there will be investment in price and refurbishment. This is a huge risk and would not be able to be done in the public arena.”
One thing is clear: it will take a lot more investment, and clearer marketing, to help Somerfield boost sales significantly.
Mike Dennis of CAI Cheuvreux says “The £300m investment could be spent several-fold on price cuts alone. Then if they do invest more in completing the conversion programmes to the fresh formats, and create the strong fresh supply chain needed to make the format work, they will have to spend millions to get new customers into store.
“The message will have to be more distinctive because there’s the risk it will be drowned out by the likes of Tesco, Sainsbury and Asda.”
In need of Saving - and Kwik
>>What Will become of the Problematic Kwik Save?
The biggest question facing the new owners of Somerfield is obvious: what on earth are they going to do with Kwik Save?
When the troubled discount chain was bought by Somerfield in 1998, the plan was to convert all the outlets to Somerfields. That didn’t work. So a year later Kwik Save was put up for sale, but no buyers could be found.
Six months later, the new management team led by John von Spreckelsen halted the sale to pursue a twin-fascia strategy and developed a new format for Kwik Save stores. But despite the renewed focus in recent years, trading at Kwik Save has been dire. The Scottish stores have been shut and like-for-like sales in the first quarter of this financial year were down 5.7%.
Most experts now expect that Kwik Save will be sold. But who will want to buy the chain?
“There are suggestions the new owners would sell Kwik Save,” agrees Seymour Pierce analyst Richard Ratner. “It’s been underperforming Somerfield for some time.”
But Mike Dennis, analyst at CAI Cheuvreux, adds: “Whoever buys it would do so as a property interest. Kwik Save has been on the market several times and even the hard discounters haven’t shown any interest.”
Another analyst believes a break-up is on the cards: “The most likely outcome is that Kwik Save will be sold off to a variety of retailers and other parties.”
Where now for John von Spreckelsen?
>>Somerfield chairman may decide to take it easy, say analysts
If the deal goes through, Somerfield chairman John von Spreckelsen will leave, to be replaced by John Lovering, who has had eyes on the job since February 2003, when his attempt to buy out the company at 120p per share failed.
Back then, von Spreckelsen refused Lovering’s bid - a brave stance, says Shore Capital retail analyst Clive Black. He adds: “I don’t think you can fault John for too many actions. To turn down an offer of 120p a share was a bold move at the time. He believed the price significantly undervalued Somerfield shares and he was proved right. He has overseen much progress and there have been significant improvements in standards.”
At 62 years of age, many analysts wonder whether von Spreckelsen will now take it easy with some non-exec roles, after taking charge of two major retail turnarounds in the past decade - at Budgens and Somerfield - and turning down the chance of doing a third at WH Smith. There are reports he has been asked to advise the new Somerfield owners and, of course, those rumours (strongly denied) that he will become chairman of Nisa-Today’s.
As for his successor, analysts don’t think they come much better, with experience of both retail and private equity. CAI Cheuvreux’s Mike Dennis says: “Lovering’s record in retail deals is unparallelled. I’m sure he’ll have a few ideas for Somerfield.”
15/02/03: Somerfield receives a conditional 103p per share offer from John Lovering and Bob McKenzie
23/04/03: The board rejects the offer on the grounds that it undervalues the company
03/06/03: The board gets an amended proposal from Lovering and McKenzie at 120p per share. It refuses to grant due diligence and the offer is withdrawn
09/02/05: Somerfield confirms that it has received a 190p per share offer from Icelandic retail group Baugur
24/02/05: The board rejects Baugur’s bid
31/03/05: Two consortia enter the fight. Baugur joins Apax Partners, Barclays Capital and the Tchenguiz brothers to offer 205p per share, while London & Regional Properties and Nomura together put 190p on the table
06/05/05: United Co-operatives makes a surprise approach
27/06/05: It then pulls out
08/07/05: Baugur withdraws from the consortium after fraud charges against chief executive Jon Asgeir Johannesson and sells its stake to Tchenguiz
03/10/05: London & Regional Properties consortium enters talks with United Co-operatives to sell 500 Somerfield stores to help fund its bid
16/09/05: The Takeover Panel issues a ‘put up or shut up’ notice to the two remaining consortia. The deadline is set at 5pm on October 14
25/09/05: United Co-operatives pull out of talks with London & Regional, effectively ending the consortium’s bid
07/10/05: London & Regional Properties pull out
14/10/05: Somerfield announces that an offer of 197p per share has been agreed