Somerfield bid will likely break it up

Retail Week learned that two of the big four had “expressed an interest” in making a bid for Somerfield, but it is not clear which two, or how much of the 900-store estate they would want.

Asda, Sainsbury’s or Morrisons may be joined in a bid by Waitrose, the Co-operative Group, or even a potential wild card entry from Marks & Spencer. It is extremely unlikely that Tesco would be able to bid for more than a handful of stores, given its more than 2,000 UK stores and more than 31 per cent share of the market. Furthermore, the prospect of another private equity firm throwing their hat into the ring seems truly remote while the credit markets remain in turmoil.

Of the potential trade buyers, gamblers might want to take a punt on Asda or Co-op. Asda chief executive Andy Bond has always maintained that the Wal-Mart-owned grocer is considering launching a convenience store chain, although he stresses it is not a priority.

However, taking on Somerfield’s stores, which have an average size of about 7,000 sq ft, would be a radical step for Asda – not least because it would mean a substantial change to its pricing strategy and distribution operations, which have been tailored meticulously for its much larger stores.

If Co-op wants to become a serious grocery contender again, it would be foolish to sit on the sidelines while Somerfield gets swallowed up by its more muscular rivals. Last week, Co-operative Group chief executive Peter Marks told Retail Week: “Clearly, if Somerfield is an opportunity, we will look at it.”

Of course, Sainsbury’s has a ready-made convenience store business to take on Somerfield, but it is thought that chief executive Justin King is only interested in a handful of its stores.

For different reasons, Morrisons would be highly reluctant to jump into another blockbuster merger, given the trauma of its Safeway integration. While Waitrose or M&S could throw their hats into the ring, they would only probably be interested in a handful of stores and their pricing strategies would not fit many of Somerfield's down-at-heel locations.

Overall, a trade bid for Somerfield would be a major shock at a time when the grocery sector is embroiled in a Competition Commission inquiry that will conclude before May 9 and the debt markets are in turmoil. Certainly, any trade bid would attract the attention of the Commission again.

While Somerfield’s business is in much better shape than it was two years ago, when it was taken private, the fact that only 230 of its 900 stores are freehold reduces its attractiveness. The big grocers will definitely be interested in a tranche of Somerfield’s stores, but taking packages of stores, as part of a break up of the chain, seems far more likely than a straight trade sale with a price tag of about£2.5 billion. Any corporate action will probably have to wait until the Commission’s chairman Peter Freeman has delivered his inquiry findings.