Safeway rebuffs approach by `desperate' Somerfield

SOMERFIELD HAS approached Safeway regarding a pounds 4bn merger as it seeks new ways to compete in Britain's increasingly cut-throat supermarket sector.

It is understood that Somerfield's chief executive, David Simons, made an approach to Safeway chief executive Colin Smith in April. But Safeway rejected the overture, saying it would not be in its shareholders' interests.

Somerfield has been keen on a merger for some time as it battles to shore up profits in the face of growing price competition and problems with the integration of the Kwik Save business it absorbed last year.

Mr Simons had wanted to squeeze synergies from the increased buying power and other efficiency gains of a larger group. The deal with Safeway would effectively have been a repeat of its strategy with Kwik Save, with the main emphasis on cost cutting rather than sales growth.

Safeway rejected the overture due to concerns over Somerfield's poor store portfolio and its continuing difficulties in integrating the Kwik Save stores into the Somerfield business.

Somerfield and Safeway both refused to comment yesterday. However, analysts suggested that Somerfield is "desperate" for another merger.

Somerfield has made several approaches to Safeway in the past few years. It also entered talks with Booker, the cash-and-carry business, last year before walking away from a deal.

Analysts suggest that Somerfield may return to Booker, which is gradually being improved under chief executive Stuart Rose. They say Iceland may also be a possible partner as the store portfolios are compatible.

One analyst said: "It is hard to see anyone wanting to merge with Somerfield as it struggles to integrate the Kwik Save stores. That deal looks like a case of marrying in haste and repenting at leisure. Somerfield is now very much in the repentance business."

Somerfield's shares have been falling sharply after they almost doubled last year following early support for the Kwik Save deal. They have fallen from 481p to 233p after the company reported that sales had fallen by as much as 20 per cent in some of the Kwik Save stores that had been converted to the more mid-market Somerfield format.

The group is now putting pressure on suppliers to cut prices and backdate the cuts to May. Somerfield confirmed that it was aiming to squeeze more gains from suppliers, but said: "This is normal practice. In common with all retailers we are trying to drive down costs. It is a competitive environment out there."

Supermarkets such as Sainsbury, Safeway and Somerfield are finding trading increasingly tough as leading rivals such as Tesco and Wal-Mart-backed Asda go from strength to strength. All three groups are seen as candidates for mergers or takeovers as the major grocers increasingly compete on a global scale.

Sales at Tesco are thought to be about 3 per cent up on this time last year on an underlying basis. Sainsbury's sales are thought to be flat or slightly negative, increasing the pressure on its embattled chief executive, Dino Adriano.

Somerfield, the former Gateway Foodmarkets business, came to the market in 1996 although its issue price was cut twice before institutional investors would buy. Initial plans to convert all the Kwik Save stores to Somerfield have been shelved due to poor customer reaction in some areas.

Safeway held merger talks with Asda two years ago but backed off on fears of a long regulatory investigation.