July 17, 2008
Co-Op Buys Somerfield in Bold Challenge to Big Four Deal Involves 880 Stores
By DOUGLAS HAMILTON
AFTER month of torturous negotiations, the Co-operative Group announced yesterday that it has agreed to buy rival Somerfield for GBP1.57bn in an audacious move that will create a tougher competitor for Britain's four largest supermarket chains.
Retail industry analysts said the deal, which is subject to regulatory approval, enables the Co-op to step up the challenge to the big four groups, some of which have been expanding into the GBP31bna-year convenience stores market that has been growing throughout the UK.
The deal comes at a time when price competition between supermarkets is intensifying as higher living costs leave consumers with less money to spend. Last month Tesco and Asda cut some prices to lure shoppers into their stores.
It is the boldest move to date in Co-op chief executive Peter Marks's plan to revive the mutual retailer, which was Britain's biggest food seller in the 1960s before falling into a decline amid strong competition from listed companies like Tesco, Asda and J Sainsbury.
"It really leads the renaissance of the Co-op brand, " Marks stated.
Adding Bristol-based Somerfield's 880 stores, of which nearly 200 are in Scotland, to its own 2300 shops will give the Co-op annual food sales of around GBP8bn, or about 8per cent of the British food retail market. This closes the gap on fourth-placed Wm Morrison, which has a market share of around 11per cent. Marks said the Somerfield stores will be rebranded as Co-op under terms of the deal, Somerfield's owners, a consortium that includes private equity firm Apex, Barclays Capital and property magnate Robert Tchenguiz, put the group up for sale in January amid reports that they were seeking as much as GBP2.5bn. The consortium bought the chain for about GBP1.1bn in 2005.
City analysts were generally positive about the transaction, saying it represented a good deal for the Manchesterbased Co-op.
"I would say it's a fair price given where the market is at, " said Stephen Pope, chief global strategist at Cantor Fitzgerald in London.
Marks said the Co-op might have to sell some stores to address local competition concerns but it was too early to say how many and he was sure there would be strong interest.
Industry sources said that around 120 stores could be sold. They said Waitrose, the food retail arm of the John Lewis Partnership, may be interested in acquiring some of the stores, including one in Glasgow's west end.
Bernstein analyst Christopher Hogbin said that, in the short term at least, the deal could provide an opportunity for the big four supermarket groups to pick up stores and take advantage of any problems integrating the Co-op and Somerfield.
"I wouldn't be surprised to see them (the Co-op) sell the 100 or so bigger supermarkets, " he added.
Marks said there would be "significant cost and revenue synergies" from the deal, as well as a "limited number" of job losses, but he would not give more details.
He said the convenience stores market was growing quicker than the broader grocery market, with soaring petrol prices adding to the attraction of local stores.
The Co-op said like-for-like sales excluding fuel rose 4.7per cent in the 26 weeks to July 12, outperforming the wider grocery market by 0.3 percentage points.
The UK's biggest mutual retailer was created last July from the merger of theCooperative Group and United Co-operatives and announced a GBP1.5bn investment drive in April aimed at doubling profits over three years.
The group, which is also the UK's biggest funeral services provider and third-largest pharmacy chain, traces its roots back to the founding of the Co-operative movement in Rochdale, Lancashire, in 1844.
The company is owned by its customer-members, who get a share of profit through a dividend that rises if they spend more. Remaining earnings are reinvested or spent on social projects, such as installing solar energy panels on schools.
Somerfield began life as JH Mills in Bristol in 1875, but changed its name to Gateway in 1950 because the city was the "gateway to the West Country". The group dropped the Gateway name in 1994 to become Somerfield and was listed on the stock exchange two years later. It was taken private by its current owners in December 2005.
Originally published by Newsquest Media Group.
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