United Co-operatives surprised everyone last week by propelling itself right into the middle of the bidding battle for Somerfield. The words audacious, ballsy and ambitious were sprinkled through press reports after the society announced last Friday that it had made an approach to the Somerfield board.
With such heavyweight rivals as Baugur, Apax and Nomura already in the fray, the first response to United’s move has to be a John McEnroe-like “You can’t be serious”. But is there more to the bid than meets the eye? Could United be fronting a bid for others?
Certainly it would make sense for the society to be the stalking horse for a group of other co-operatives keen to expand.
“It will be very interesting to find out if the United Co-operatives is acting in isolation or whether it is in tandem with others in the co-operative movement,” says retail analyst at Shore Capital, Clive Black. “The co-ops more or less trade in defined geographical areas. If United was working on its own to buy nationwide operator Somerfield, it would be trading against other CRTG (Co-operative Retail Trading Group) and society members.
“That would either cause tension in board meetings, or suggest there has been dialogue between the different societies.”
MD at Harris International Marketing, Tom Fender, agrees that it is likely United will have had discussions with other members because of the politics of the Movement. “The co-operatives stay loyal to trading areas and common sense has it that conversations must have taken place,” says Fender.
United chief executive Peter Marks was reported to have said that he had no intention of joining any other bidders in the quest for Somerfield, but an official statement swiftly followed to clarify the matter. United Co-operatives said that, although it has no current intentions to partner with other potential bidders, it reserved the right to explore any and all options available.
United is now cagey about any interviews, but Marks says: “We are taking a look at Somerfield because we believe that a combination of our businesses could make sound commercial, operational and financial sense.”
Fender says that United has shown gumption in making a move on the bigger company and says that if the bid succeeds, the two businesses would have great synergy. HIM market research shows the retailers attract predominantly female shoppers, the age profiles of shoppers are the same and both chains have a loyal customer base with high shopper visit frequency.
“I applaud the co-op for going for it,” says Fender. “United’s move reminds us that there are more co-ops than just the Co-operative Group that can become a major player in the industry. There will be challenges ahead but let’s concentrate on the opportunities. Convenience retailing is going up and up; the sector is growing at 5% per annum, driven by lifestyle change. The store locations fit nicely as Somerfield is slightly biased to the high street and the co-operative is based more in residential areas,” he says.
“And United has experience in acquisitions, albeit on a much smaller scale, so will have identified the barriers that it will have to overcome.”
United completed the acquisition of seven Action Stations forecourts last week, which followed the acquisition of 12 Neighbours and 19 Leathleys Quality Fare stores last year. But Somerfield has 1,308 stores, compared to the 509 food stores in United’s portfolio.
Somerfield’s sales were £5.05bn for the year ending April 24, 2004 (financial results for the year ended April 30, 2005 are due on July 6), in comparison with the co-op’s sales of £1.9bn for the year ended January 22. Group food sales were £806m.
Black is less upbeat than Fender over United’s ambitions, if it goes it alone, given that the sheer size of the attempted acquisition would present a formidable task. “We presume it has got the finances sorted out but the operational challenges would be huge,” says Black.
“United would have to keep a lot of the Somerfield management and that would prevent it making the usual cost savings associated with such a takeover. Paying £1.25bn carries more than reasonable risk for anyone.
“And although there are the property assets, Somerfield has a relatively weak position in the market and Kwik Save has no role to play today.”
Black says that a retailer would be better placed than investors to make gains from Somerfield, but has a warning for United: “People thought the same of Morrisons and it has failed miserably with Safeway.”
But Andy Thornton, MD of convenience consultancy Srcg, says the Baugur deal offers much more for Somerfield.
“Strategically, Somerfield has the right direction but has not had the time to carry it through. It has outlined its position and focus on convenience and it needs time to get that, and what it is doing with Kwik Save, sorted out. The Baugur proposition would give the current management, which is a good team, the opportunity to do what is necessary away from the spotlight of the City.
“That makes a lot of sense, but merging with another retailer could make everything more complicated and I’m not convinced of the merits of the deal for either party.”
Asda president Any Bond refused to comment on Somerfield this week, but at the end of April rumours spread that Asda/Wal-Mart had appointed investment bank Lazard to explore a possible offer. Analysts say it is unlikely Asda would strike out on its own because it would face immediate problems with the Competition Commission.
When the Apax Partners-backed bid team ruled out joining forces with the UK’s number two retailer in its bid for Somerfield at the beginning of May, the rumours faded.
However, if United decide to make an offer, there could be another chance for Asda to broker a deal to get some of the bigger Somerfield stores in order to get hold of the extra floorspace it so hungers for.