Safeway added to Wal-Mart shopping list

US firm that took over Asda rumoured to be ready to lodge £2.8bn bid.

The world's biggest stores group is thought to be plotting an audacious bid to challenge Tesco's position as Britain's No 1 grocer.

Three years after taking over Asda, there is speculation that giant US discounter Wal-Mart wants to snap up rival Safeway in a deal that could be worth £2.8bn.

If the deal goes through, the combined new group would present toe-to-toe competition to Tesco, which currently dwarfs its rivals and uses its unmatched buying muscle to squeeze the toughest terms out of its suppliers. Sainsbury would be left trailing a poor third in the market.

Asda is said to have been sounding out officials at the office of fair trading (OFT) about whether such a deal would be allowed by the competition watchdogs and what conditions they might attach. The store chain would, at the least, be forced to sell off stores in areas dominated by Asda and Safeway outlets.

Rival operators - like Sainsbury, Morrisons and Waitrose - would then have to be offered the stores to ensure shoppers still had a choice.

Yesterday the OFT said it believed any such bid would be referred to the EU competition commissioner, Mario Monti, purely because of its size. But analysts pointed out that because it is a purely UK deal Mr Monti would probably refer it straight back to his UK counterparts.

Tesco currently takes 17.5% of the £100bn a year shoppers in Britain spend on groceries; its nearest rival is Sainsbury, with a market share of 12%. Asda and Safeway together would have a 17% slice of the market and the same number of stores as Tesco.

Yesterday Asda refused to comment on whether it has been holding secret talks with the OFT. A spokesman said: "It is just market speculation and we do not comment on market speculation".

But it would not be the first time that Asda has shown an interest in Safeway. The two groups held merger talks in 1997, and then again in 1999, just before Asda was snapped up by the US group.

The arrival of Arkansas-based Wal-Mart three years ago sparked a price war between the supermarkets at a time when the government was targeting them as part of its "rip-off Britain" campaign. Wal-Mart were seen as injecting vital new competition and its top executives were even invited to meet Tony Blair in Downing Street.

But the price war almost crippled Safeway and Sainsbury. The two groups saw sales plummet as they discovered that they could not compete with the immense buying power of the much bigger Tesco and Wal-Mart-backed Asda.

Both stores have since had to reinvent themselves, and have abandoned the struggle to match their rivals across the board on price. Each now offers deep discounts on only a limited range of goods and Sainsbury has hired celebrity chef Jamie Oliver and now focuses on quality rather than size. Safeway, meanwhile, hired Argentinian Carlos Criado-Peres, a former Wal-Mart executive, to take its stores upmarket.

The initial results of his efforts were impressive, but in recent months there have been concerns that Safeway's recovery is running out of steam and its share price has once again been in reverse, making it a bid target.

Tesco has gone from strength to strength. Its annual profits have breached the £1bn benchmark, it has become the world's biggest online grocer and it is expanding overseas.

If Asda is putting together a bid plan, it would spark huge opposition from both Tesco and Sainsbury, which would argue that three major players would automatically mean less competition than four. But if successful it would mark a complete reversal of fortunes for the Leeds-based group.

Ten years ago the arrival at Asda of Archie Norman - now a Tory MP - as chief executive marked an about-turn in its declining fortunes. He rebuilt the near-bankrupt group, making millions out of the recovery, before selling out to Wal-Mart.

The Asda recovery also made the reputation of Allan Leighton, who took over from Archie Norman and is now chairman of the Royal Mail.

A bid would allow Asda to enlarge its chain of stores overnight at a time when it is almost impossible to get planning permission for new stores. Safeway has a large number of stores in the south, where Asda is short of outlets. However, the two both have wide coverage in Scotland and competition watchdogs would be bound to force sell-offs north of the border.

Asda is especially keen to find new outlets for its George range of clothing - the brainchild of former Next boss George Davies - which is one of the UK's fastest growing clothing brands.

Mr Davies no longer works for Asda, but the George label goes from strength to strength, notching up double-digit sales growth.

Yesterday a Safeway spokesman said the group had not received any offers and was not in any talks about the future ownership of the business.

He also ruled out selling off parts of the chain in order to raise the cash to pay for more store revamps.

"We are not interested in talking to anybody", he said. "We want to remain independent and complete and drive forward with our existing strategy."

How the big five line up

Tesco

Number of staff: 195,000

Market share: 17.5%

Number of stores: 729

Sainsbury

Number of staff: 145,000

Market share: 12%

Number of stores: 460

Asda

Number of staff: 120,000

Market share: 10.5%

Number of stores: 256

Safeway

Number of staff: 90,000

Market share: 6.5%

Number of stores: 480

Waitrose

Number of staff: 29,000

Market share: 2.5%

Number of stores: 136