Sainsbury this morning said it is to consider tabling a £3.5bn cash and shares bid for Safeway which trumps the offer made by Morrisons last week.

Chief executive Sir Peter Davis said that Sainsbury had identified Safeway as a possible target 18 months ago and had ben having intense discussions with the rival chain in the past three months.

However, he said no bid had been tabled until now because Sainsbury had not een keen to launch a hostile takeover.

Sir Peter said there were six reasons why such a deal would work; Sainsbury and Safeway have similar customers; Safeway customers would benefit from lower prices; ranges would improve; Sainsbury has experience of dealing with different sizes of store formats, so would be able to leverage the Safeway portfoliio; Sainsbury management has vast “integration experience”; and that the group had identified £300m of cost savings and believed more could be achievable.

Sir Peter said around 90 stores - especially in the south - would need to be disposed of in order to satisfy local competition issues. He added: “We actually believe the competition authorities have a great opportunity to determine what they want to do with the market inrastructure now that Safeway has opted out.”

Sir Peter would not be drawn on whether he felt Wal-Mart would enter the fray.