The auction of neighbourhood food retailer Somerfield superficially puts the retailer in a position of strength but, in reality, its situation is ambiguous.

External approaches, rather than internal imperatives, prompted Somerfield to consider a sale. The eagerness of potential buyers has raised expectations that the business could fetch as much as£2.5 billion – more than a third of Sainsbury’s market capitalisation. Somerfield should be quids in.

But buyers – potentially Asda, Sainsbury’s or the Co-op – hold some strong cards.

First, there’s the perception – despite statements to the contrary – that Somerfield stakeholder Robert Tchenguiz, who took a bath on his Sainsbury’s investment following the collapse of Qatari interest, is keen to sell and realise cash.

Then there’s the fact that the most recent TNS data shows Somerfield has been losing market share. It’s true that the grocer has substantially cut back its store portfolio, but a decline in share of spend is rarely cause for celebration.

And who exactly might be able to bid, given the ongoing inquiry into grocery competition? Indeed, whether any single retailer would want Somerfield’s entire estate is also open to debate.

If Somerfield failed to attract a high enough price, its directors would be happy to carry on running the business. It generated Christmas like-for-like growth of 6.7 per cent, putting it among the top seasonal performers and directors see plenty of scope to motor ahead.

But just how far can they travel? Ultimately, Somerfield’s backers need an exit. The alternative to a sale is a float and it’s hard to envisage the circumstances in which the City would welcome a comparative food tiddler back onto public markets, especially in a category dominated by Tesco and of growing interest to Sainsbury’s, Marks & Spencer and even Asda, which at the moment has no convenience presence.

Successful as Somerfield may be, it looks as if it needs a deal more than most trade buyers need it – much as they might like it.

So the food retailers circling Somerfield will seek to drive a hard bargain. They know that, in the end, the chain is likely to go to one or other of them or be split between them. That doesn’t rule out a deal mutually acceptable to seller and buyer, but perhaps not at the sort of valuation Somerfield’s backers would prefer.

George MacDonald is deputy editor of Retail Week

Topics