Suppliers are gunning for Morrisons. Consumer opinion is mixed. As for shareholders, a cash-based killer offer from Wal-Mart would be hard to turn down, but can they afford to gamble? With speculation as to who will buy Safeway changing daily, it is clear the last great bidding war in UK grocery is wide open. And you can be sure there are still a number of players standing in the shadows, ready to jump in at the right moment.
The auction opened with Morrisons' shock bid on Thursday January 9, the only one actually on the table as The Grocer went to press. Its £2.9bn share offer (now standing at £2.6bn thanks to the downward spiral in its share price) was quickly trumped on Monday when Sainsbury, desperate to get its bid in before Wal-Mart to gain some credibility, announced its intention to put in an offer priced at £3.2bn in cash and shares.
To no-one's surprise, Asda-owner Wal-Mart followed the next day, with a statement saying it was considering making an all-cash offer but containing little extra detail, although the market expects it will table a bid up to £3.5bn. This approach contrasted greatly with Sainsbury's hastily called press conference, in itself a rarity, at which chief executive Sir Peter Davis covered off the strategic rationale for making a bid in some detail. This included the revenue opportunity, cost synergies, implementation and the need to dispose of around 90 stores to satisfy Office of Fair trading concerns. Meanwhile Tesco, which released some of the best Christmas trading figures this week, is keeping a low profile, but is believed to be working on a deal behind the scenes.
Then there are the private equity firms. At least three are rumoured to be looking at Safeway with a view to carving it up. Ex-Asda and now Post Office boss Allan Leighton surfaced in October last year as a possible bidder together with the Royal Bank of Scotland.
Last week his name was being tied with a different deal being put together by Kohlberg Kravis Roberts, former owner of Safeway in the US. This week KKR was understood to be in discussions with Merrill Lynch about a £3bn bid. Its name has also been linked with Wal-Mart. Another equity firm-led deal is understood to be working with a big name to table a third bid. Perhaps it is Tesco which could absorb some smaller Safeway stores into its growing convenience portfolio without upsetting the Competition Commission. Such is the frenzy around Safeway you can imagine barely an eyebrow raised if Stuart Rose or even retail deal king Philip Green came out of the woodwork.
The deal could be snatched from right under the noses of Wal-Mart, Sainsbury or Morrisons by any of the above. The circumstances couldn't be more favourable.
Any bid from Sainsbury and Wal-Mart will almost certainly be referred to the Competition Commission, which could take up to six months to make a decision.
Wal-Mart made an informal submission for confidential guidance to the OFT on Tuesday. The OFT has a target to return its decision to secretary of state for trade and industry Patricia Hewitt within 45 working days, and on Wednesday posted an invitation to comment on competition or public interest implications by January 31.
Sainsbury has indicated its intention to complete a formal merger form and pass it to the OFT. That process will take up to 35 working days but could be completed in 20.
Shareholders could avoid a Competition Commission inquiry by voting for Morrisons, which is likely to go through uncontested. Morrisons delivered its submission to the OFT on Wednesday, with chairman Sir Ken Morrison saying: "We strongly believe that four national food retailers are better for competition than three. Morrisons and Safeway have little overlap. Any other combination would be bad news for customers who would face the risk of less choice and higher prices." Morrisons has up to 28 days from the day it announced its bid to the Stock Exchange to send its offer document to shareholders, in other words by February 6. According to Citigate Dewe Rogerson, on behalf of the company, the offer document is imminent.
Other companies have 21 days from the date the document is posted to submit their bids. Their offers go through the same process, so in theory, provided a formal bid is tabled within the next six weeks at the latest, shareholders can compare the options.
A higher cash offer could prove too much of a temptation for shareholders, but if they decide to reject Morrisons in favour of Wal-Mart or Sainsbury, the worst case scenario would be the Competition Commission blocking the deal, by which time Morrisons has walked away and Safeway is left limping. In normal circumstances, Morrisons would be able to re-bid after six months, but Schroder Salomon Smith Barney's Mark Todd believes it has a good case for claiming exceptional circumstances and could re-bid earlier. And Morrisons' strong balance sheet means it may decide to increase its initial bid in face of the competition, probably incorporating a strong cash element.
"Fortune favours the brave and Morrisons has put itself in a fabulous position," believes Martin Deboo, director of OC&C Strategy Consultants."At worst it has created the option to acquire offloaded stores at distress prices, plus a £29m break fee consolation prize. At best, it still has a realistic chance of walking away with the whole thing, again at a fire sale price if the Competition Commission denies the two big suitors."
Meanwhile private equity firms will have no problem offloading stores to any of the above plus Tesco and Waitrose, all of whom are desperate to buy market share in the face of intense competition and planning restrictions. At least one main player The Grocer spoke to is taking the possibility of a bid from this source seriously.
Sainsbury looks set to be the biggest loser if it makes a bid which is later rejected. One analyst said: "Its share price is at a 12-year low and it doesn't have the greatest currency to buy Safeway." He adds: "Asda would have to get rid of 50-60 stores, and it would be easiest for the OFT to clear Morrisons."
Seymour Pierce takes it further, saying perhaps Sainsbury would bid for Morrisons if Asda got Safeway.
What is clear is that the war of words has only just started as the contenders slug it out to gain shareholder approval.
And let's not forget the main protagonists have much experience of playing the political game.
With two knighthoods among them (three if you count Sir Terry Leahy), Sainsbury's strong relations with New Labour, Asda president and chief executive Tony DeNunzio chairing Patricia Hewitt's new retail strategy group, and all no doubt noting the lessons from the last Competition Commission investigation, the lobbying groups are sure to be out in force.
As for shareholders, there are some deep pockets out there and a £4bn bid may not be out of the question.
And if the bidding war continues to heat up, a break up of Safeway looks the most likely outcome.