Supermarkets to join £455bn Euro-bid battle

BY NIGEL COPE

Europe's £455bn grocery market is poised for a period of frenetic takeover activity in the next five years as supermarket operators such as Sainsbury and Tesco expand beyond the increasingly saturated British market with further deals on the Continent and in the US.

Stricter planning regulations on out-of-town shopping developments, combined with pressure on prices in the UK and increasing competition from discount groups such as Aldi and Netto, mean supermarket groups could find themselves embroiled in a bidding war for Europe's most marketable assets.

A contributory factor is the succession problems faced by many family- owned grocery groups on the Continent, which could force some to sell. "Once one decides to sell, the others will be forced to look at their strategies. It could be like a dam bursting," said Fredddie George, of Paribas Capital Markets, who has just completed a report on the expected battle of the wire baskets.

The Euro-bid battle is likely to be exacerbated by more stringent conditions on new stores in Continental Europe, which means the big players will have to expand by acquisition rather than with new stores.

In France, the restrictions on out-of-town stores are tighter than new proposals here. In Spain and Portugal, the local authorities are limiting opening hours and Sunday trading in an attempt to protect town centres. Belgium, which already has strict rules on new stores, is making them fiercer still. So who are the predators and who the prey?

In Britain, Iceland is viewed as a potential target due to its weak share price. On the Continent, the French groups Casino and Docks de France could be vulnerable, as could Delhaize and GIB of Belgium.

Mr George said British supermarket groups were the most likely predators, with Sainsbury, Tesco and even the bid target Argyll top of the Paribas list.

The key to the takeover binge is the cash piles being amassed by UK supermarket groups as store opening programmes are cut. Tony MacNeary, food retail analyst at NatWest Markets, said that by the end of 1997 Sainsbury would have amassed £2.1bn of surplus cash and Tesco would have a cash mountain of £1.8bn, followed by Argyll and Asda with nearly £1bn each. "This money will be spent on large acquisitions, not on high dividend payments," Mr MacNeary said

Mr George said improved management systems, the trend towards more international tastes and the growth of own-label products were already encouraging the UK superstore groups to diversify.

Sainsbury has acquired 15 per cent of Giant Foods of the US and this year spent £290m on the takeover of Texas Homecare to strengthen its DIY division. Tesco has acquired William Low and is having success with Catteau, its first French foray.

The question is where the predators swoop first. According to Mr George at Paribas, Sainsbury is likely to buy the rest of Giant Foods for about $1.4bn in the next couple of years. Docks de France, with which Sainsbury's has links, could provide a good entree to the French market. Tesco has said it would like a further acquisition in France to add to Catteau.

Argyll's position is more complex. Although it is viewed as a bid target by many, Mr George said corporate raiders would risk significant earnings dilution and reap little in the way of synergy gains.