It was the worst-kept secret, but at last, Peter Marks, chief executive of The Co-operative Group, has confirmed what everybody knew: that it is in talks to buy Somerfield, the UK's fifth-largest grocery retailer from its backers: private equity owners Apax Partners, Barclays Capital, Robert Tchenguiz and Kaupthing Bank.

A price hasn't been agreed as the society is carrying out due diligence, Marks told The Grocer, and a deal will not go ahead until the summer at the earliest, if it happens at all, as this is not a "must-have" acquisition.

But if it does, it would have the potential to change the landscape of UK grocery forever. The Co-op Group, which was the UK's largest grocery retailer only half a century ago, would be propelled back into the big league as the UK's fifth-largest supermarket. Its 2,223-strong estate could grow to 3,123 stores, with sales of £8.1bn and a market share that would double to an estimated 7% (exact figures available from TNS are for all co-ops).

"Somerfield is a great strategic fit for our food business," says Marks, who tabled an interest in Somerfield three years ago as CEO of United Co-operatives, which merged with The Co-op Group last year. "We are both neighbourhood retailers and the deal would also give us the opportunity to reposition our business as the UK's fifth-largest grocer and the leading UK c-store retailer."

Even though The Co-op Group is still settling down after its merger with United, analysts and those in the co-op movement agree the deal would make sense.

"The merger with United seems to be going well and, while integrating Somerfield would be a challenge, I don't think it is beyond the group's capability," says a source in the co-op movement.

Despite such optimism, taking on 900 more stores - many of which are larger than The Co-op Group's usual sites - would be a challenge. The society operates about 1,600 c-stores and 600 small to medium-sized stores and some analysts believe it should position itself as a c-store operator rather than as a multi-format multiple.

"I think it would be better to compete as the biggest c-store player, bearing in mind both retailers have positioned themselves in this area," says Neil Mason, a senior retail analyst at Mintel.

Reports suggest The Co-op Group is likely to sell off Somerfield's larger stores to its rivals, with as many as 200 to Asda, a subject Marks refuses to discuss. But there are tantalising hints that the society might be looking to take on Somerfield's larger stores too, as the trial of five new "market town" stores - described by The Co-op Group as small/medium supermarkets roughly 15,000 sq ft to 17,000 sq ft in size - have been a huge success.

The stores were refurbished with wide aisles, signage highlighting the society's ethical and environmental principles and even a coffee shop, where space allowed. Since reopening all the stores have delivered double-digit sales growth and the society is planning to roll out the programme to its other larger stores.

"The trial has given us the confidence to operate bigger stores and we will increase the pace of refits for this part of the estate," says Guy McCracken, head of food retail at The Co-op Group.

Although smaller than the hypermarkets of Tesco, Sainsbury's and Asda, the market-town format is similar in size to many of the larger Somerfield stores, which average 8,000 sq ft to 10,000 sq ft.

Marks also points to the overall improvement in like-for-like sales, up 4.6%, as evidence that the group is benefiting from synergies and the investment from its three-year plan. Analysts feel that if the managements worked together on branding, community retailing and product ranges, The Co-op Group would have the clout to ruffle the feathers of the multiples.

"Given the intensity of the competition between the big four, it's a very tough market. However, a deal would help The Co-op Group improve its position," says Mason. "Its greater buying power would enable it to gain better terms and conditions with suppliers."

Somerfield's strength in ready meals could benefit The Co-op Group's product range, says another analyst. "A deal would bring in some much-needed expertise. That end of the market is becoming more competitive," he says.

There are still a lot of discussions to take place, and no doubt the Competition Commission will show an interest in any new deal in the grocery sector, but perhaps the big four should start making room for a fifth element. n