Outlook: Why Sir Ken remains the Safeway bidder others must beat

Tesco's Sir Terry Leahy speaks like a man who has won the war and has no intention of losing the peace when the dust finally settles on the six-way (yep, that's right) bid battle for Safeway. Having engaged in hand-to-hand combat to turn Tesco into Britain's biggest grocer by a clear margin, he is not about to stand idly by while his rivals carve up what is left of the market. In fact, Sir Terry makes it sound as if he would have been positively derelict in his duty had Tesco not thrown its hat into the ring for Safeway.

Tesco says that if and when it bids for Safeway it will offer a "compelling" price to shareholders and some equally compelling arguments to the regulators as to why it should be the one to lead the reshaping of the market. It is hard to dispute Sir Terry's credentials, given the way Tesco has left its rivals standing in terms of product innovation, pricing and store formats.

There is, of course, an equally compelling argument for staying out of this extraordinary game of supermarket sweep. Tesco already has 27 per cent of the market and its share would rise to 33 per cent even after disposing of a quarter of Safeway's stores as it proposes to do. That makes a six-month referral to the competition authorities pretty much automatic and a complete block on buying Safeway a highly likely outcome once their investigation is complete. Instead, why not use that time to crunch the competition still further while Safeway remains becalmed and Sainsbury's and Asda are tied up in front of the regulators? Then there are the bid costs Sir Terry would be saving, even though these would probably amount to no more than a week's profits at Tesco.

Clearly, this has been debated long and hard up at Tesco's Cheshunt headquarters. Why else has it taken Sir Terry two weeks to show his hand when Sir Peter Davis of Sainsbury's was out of the blocks within three days of Sir Ken Morrison firing the starting gun with his agreed all-share offer for Safeway?

The arrival of Tesco on the scene does not change the fundamental question that the competition authorities have to answer: can they countenance a reduction in the number of big supermarket players from four to three? But it does pose the question in capital letters.

Sir Terry denies the move is a spoiling tactic but that is exactly what it looks like. Tesco's intervention makes it all the more certain that the whole industry will be packed off to the regulators, who may just decide that none of the big three should be allowed to buy Safeway.

The chances of a financial buyer such as Kohlberg Kravis Roberts or Texas Pacific being referred must also be high unless they give undertakings not to start disposing of Safeway piecemeal within a few months of acquiring it.

That just leaves Sir Ken and a dark horse called Philip Green. Mr Green would probably make a cash bid equivalent in value to Morrisons' all-share offer before the price of Sir Ken's paper began to plunge. But Morrisons can surely outbid the Green machine which, not being an owner of supermarkets, has nothing to offer in the way of merger savings. An extra 50p a share, say, in cash, would hardly stretch Morrisons' balance sheet and would test Mr Green's seriousness.

Morrisons' bid raises no real competition issues and, indeed, would strengthen what is a weak fourth player in the market. So provided Sir Ken holds his nerve, he must remain the favourite to bag Safeway, notwithstanding what the bookies say. If he does eventually emerge the winner, then Sir Terry Leahy will have played an important part in his victory.

Chunnel vision

New railway line built on time and to budget. A novel headline in this day and age but not one, alas, which relates to an important piece of engineering such as the modernisation of the West Coast Mainline or the Brighton to Bedford upgrade or even the much-delayed Crossrail, which may one day link Stratford in east London to Paddington in the west.

No, this headline refers to the construction of the first phase of the Channel Tunnel Rail Link, which was completed earlier this week. The Transport minister John Spellar even turned up for the photo shoot. Perhaps he should have arrived on a white elephant. Phase one has cost some £2bn and will shave a measly 20 minutes off journey times from London to Brussels and Paris. When phase two is finished in four years it will have cost a further £3.3bn and cut journey times by another 15 minutes. Not much of a return, you might think, for the £5.2bn of taxpayers' money which was in effect sunk into the CTRL after John Prescott agreed to underwrite the debt issued by its promoter, London & Continental Railways.

LCR says, of course, that faster journey times to the Continent are only part of the story. The link will also help relieve congestion on local commuter services, free up more capacity for freight and regenerate what it likes to call the east Thames corridor. However, most of these additional "benefits" were only thrown in at the last minute to help make Mr Prescott's arithmetic add up.

The truth is that the CTRL, wonderful engineering achievement that it is, remains a dubious use of taxpayers' money. All the more so when the Strategic Rail Authority has already run out of money to improve the creaking national rail network and when the reliability of the service remains abysmal, as Mr Spellar's boss, Alistair Darling, reminded an audience of train operators yet again yesterday.

The Government's madcap answer to the shortage of funds for new rail schemes is to dream up an extra council tax on householders who would benefit from the consequent rise in the value of their properties. Rest assured, they won't get a rebate when the train fails to turn up on time. Perhaps the simplest answer is to move to the Continent and start commuting by CTRL. After all, we taxpayers have already paid for it.

Mobile mania

The Competition Commission's verdict on the "termination charge" that the UK's four mobile operators levy on calls to their networks from fixed-line and other mobile networks is, in many respects, perverse. The outcome could be that the mobile operators end up earning more not less under the commission's proposals by recouping the cut in termination charges elsewhere. Nor is there any absolute guarantee that the reduction in charges will be passed on to consumers by BT, which stands to be the biggest gainer from the price cuts and was studiously vague about how its customers would benefit. Indeed, there is every danger that it will merely entrench BT's already overwhelming and unfair competitive advantage in fixed-line telephony. That said, the mobile operators only have themselves to blame. They clearly put their case very badly to the commission and will have to improve their presentation an awful lot to fare any better in a judicial review.

Furthermore the problem only arose in the first instance because termination charges were too high to begin with. It might have been a convenient way for the mobile operators to pump up their revenues at the expense of customers but it does not say much for the supposed competitiveness of the industry.

m.harrison@independent.co.uk