Sainsbury ready to thwart Asda deal with bid for Safeway

SPECULATION is mounting that J Sainsbury, Britain's second-largest supermarket chain, could launch a takeover bid for Safeway, its troubled competitor.

Sainsbury is thought to be considering a bid to thwart a potential tie- up between Safeway and Asda. Such a move would create a significant competitive threat, relegating Sainsbury to number three in the supermarket industry's pecking order.

However, industry sources suggested that Sainsbury is only likely to act in response to any move by Asda. It thought to favour a merger with William Morrison, the Yorkshire-based supermarket chain.

Sainsbury and Safeway have never held any takeover talks. A bid would be fiercely contested by Safeway's management led by chief executive, Colin Smith. He is keen to retain the group's independence and is currently unlikely to entertain any overtures from Asda or Sainsbury.

One industry source said yesterday: "This looks like a plant from Sainsbury. What they are doing is warning they will join the fray if Asda renews its interest in Safeway."

Safeway and Asda held merger talks last autumn and went as far as seeking confidential advice on the deal from competition authorities, only to abandon discussions when they became public.

Yet analysts believe Safeway's disappointing trading performance, which has seen it make three profits warnings in a year, makes it increasingly vulnerable to a takeover.

The group's predicament was highlighted last month when it revealed Christmas trading had been poor and profits for the year to March 1998 would fall to pounds 375m compared with analysts' forecasts of around pounds 410m and the pounds 430m it made in the previous year.

Mr Smith is understood to be keen to address Safeway's trading problems rather than seek a merger. "Safeway continues to focus on improving its trading performance," a company spokesman said yesterday.

The acquisition of Safeway would give Sainsbury a stronger presence in Scotland, where its market position is relatively weak. However, some City observers remain sceptical about the merits of such a deal and are concerned that Sainsbury, which has had its own trading problems in recent years, would consider such a large and complicated purchase.

A bid for Safeway by Sainsbury would create huge competition concerns and the Government would no doubt require the combined group to sell a large number of stores.

However, analysts believe the trend towards fewer and larger supermarket chains will continue. They predict that the consolidation of the industry is likely to gather speed over the next few years.

Somerfield and Kwik Save have recently announced plans to join forces to take on the might of the bigger multiples.