Outlook: Why Tesco's Sir Terry Leahy needs to watch his back

Just that old chestnut again, or something a little more serious this time? The idea that Asda would eventually pounce on Safeway has never been far from the headlines ever since it emerged five years ago that the two had held unsuccessful merger talks. The story has sprung up anew over the last week on apparently well informed suggestions that Asda, now owned by Wal-Mart, has been sounding out the Office of Fair Trading.

One thing is certain. Wal-Mart would jump at the chance of adding Safeway to its armoury if it thought the endeavour remotely possible. Asda has proved a hugely successful acquisition for Wal-Mart, unlike some of its other overseas forays, and what at the time seemed a full price has been completely vindicated. Wal-Mart has since used its international buying power to maximum effect. A company which a decade ago was seen as a basket case is forging ahead. Now snapping at the heals of Sainsbury for second place in the UK grocery market, and quite likely to achieve it some time this year, the obvious question is what next?

Wal-Mart is an ambitious company with grand designs. One of those is to be market leader in every territory it operates in. Toppling Tesco from its perch is already on the radar screen. Wal-Mart is arrogant enough to believe it could achieve this through organic growth, but it would be so much quicker to do it through an acquisition, and with Safeway shares trading not only at a whopping great discount to the sector, but also to the company's book value, there could scarcely be a better time to push the button.

Competition concerns are still the biggest obstacle to a bid, but the task is not impossible. Much has changed over the last five years. Allegations of profiteering were largely dismissed by the Competition Commission in a report that generally gave the big supermarket groups a clean bill of health. A vibrant fifth player has emerged in the shape of William Morrison, while Tesco has consolidated its leadership with continued impressive gains in market share.

Concern about undue local concentration of market power could be easily addressed through disposals. It is very much a part of Wal-Mart's pitch to competition regulators that it has delivered on its promise of American-style prices in its Asda stores. If it were allowed to buy Safeway, these prices could be rolled out nationally, providing a fresh wave of price competition among the supermarket groups.

Carlos Criado-Perez, chief executive of Safeway, is was a Wal-Mart man until he joined Safeway. The two did not part on the best of terms and nothing would dismay him more than a Wal-Mart bid midway through the execution of his recovery strategy. His shareholders might think differently. Round at Tesco, Sir Terry Leahy's whole purpose is bent on his overseas expansion plans. He's not thought it necessary to watch his back, confident that the competition authorities would never allow the creation of an effective duopoly through the shrinkage of the big four into the big two plus an also ran. He may need to think again. Any bid would be referred to the Competition Commission, but if Wal-Mart can convincingly argue the case for clearance, Sir Terry has got a mighty big problem on his hands.

Royal & SunAlliance

The announcement of Legal & General's rights issue must have caused alarm verging on blind panic round at the Berkeley Square headquarters of Royal & Sun Alliance. Royal desperately wants and needs to do its own rights issue, but it is not yet ready and, unless it gets a move on, it will lose its place in what is already a very long queue.

Royal & SunAlliance is a bit different from the string of life companies hoping to raise fresh capital in the market, having chosen some years ago to concentrate on general insurance rather than savings. With ever more alarming reports coming out of the United States about the extent of asbestos related claims, no shareholder in his right mind is going to commit new capital to Royal & Sun until the company's liability is properly quantified.

This is proving a nightmare, if only because the US courts keep shifting the goal posts. Add to that the fact that the company is still in talks with the Financial Services Authority about the size of its guaranteed annuity liability in the now closed life funds, and it is easy to see why Royal cannot yet go live on its fundraising plans, much as it would like to.

Bob Mendelsohn, the chief executive, is also a stumbling block. Investors won't pump in more capital until he's gone and a credible successor is announced. That, however, is the least of Sun's problems. As one seasoned City observer said last night, removing the chief executive is the easy part; you just shoot him in the saddle. Royal & Sun doesn't appear to be in any immediate financial danger. But unless it raises more money soon, it won't be able to take proper advantage of the rebound in premiums that has taken place since 11 September and would seem to face a future only of decline. Property disposals will help, but amount to no more than a sticking plaster solution.

Royal & Sun will have to say something to the market soon about its plans. Unfortunately, it is still a long way from being able to launch that long expected £1bn rights issue.

BAE Systems/Portillo

Michael Portillo dared and lost to Iain Duncan Smith a year ago, since when he has been carving out a new career away from the hurly burly of national politics. And a rather good fist he has made of it too. He has been such a wow on the telly with Portillo's Progress and his specials on the Spanish Civil War and Wagner (his great love outside politics) that there is even talk of the BBC making him into a full-time luvvie. Now he's been given a grown-up job to go with his media dabbling as well – a seat on the board of BAE Systems, the world's second biggest defence company.

There is still the small matter of having to represent his blue-rinse constituents of Kensington and Chelsea, but a day a month at BAE ought not to put democracy in mortal danger. El Portillo's most obvious credential for the BAE job is his stint as Tory Defence Secretary in the mid-1990s, during which time the Eurofighter project well and truly took wing and he made that speech he would much rather forget about the SAS.

Mr Portillo denies that he will be going around knocking on the doors of Arab potentates flogging them fighters on the grounds that Sir Dick Evans, the chairman, is much better at it and has a fatter contacts book anyway. So what will he be doing at the monthly board meeting? Whistling the Ride of the Valkyries? Threatening to descend on the Ministry of Defence like a Wagnerian God unless they give BAE a monopoly in warship building? He will be a good brain to have around the table, replies BAE. A more cynical interpretation is that having awarded so many contracts to BAE while in government, Mr Portillo surely deserves some kind of a payback. Whatever. Anyone with the front to be psychoanalysed on prime time TV about his fascination with Wagner has got to be a useful addition to any boardroom.

jeremy.warner@independent.co.uk