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ILO meeting to discuss mergers and acquisitions in commerce
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Tesco joins the Safeway
bidders: Competition for British supermarket chain raises serious questions for retail workers and their unions "We are never nervous of competition. We respect all our competitors. But what is being asked for is a major restructuring [of the grocery business] and you cannot expect us to sit on the sidelines." Tesco, Britain's largest retailer, has now entered the race for Safeway. Terry Leahy, Tesco's CEO, said to the Guardian that Wal-Mart, who is also bidding for Safeway, is globally much larger than Tesco, and that this must be taken into account by the competition authorities. Today, the Safeway management backed away from their recommendation to shareholders to accept the Morrison bid, but still signaled that this is their preference: "The board of Safeway continues to believe that a combination with Morrison represents an opportunity to create a new dynamic force in UK food retailing and remains fully supportive of Morrisons pursuing its offer", said Safeway Chairman David Webster according to the BBC. "However, in the light of the announcements by potential competing offers, we are advising shareholders to await developments." Why should competition authorities block Tesco in favour of Wal-Mart? Tesco would increase its own market share from 25 to slightly over 30 per cent, would it be allowed to buy Safeway. Asda Wal-Mart would, if it was successful, have a share of about 25 per cent, close to what Tesco has at present. Also Sainsbury's would end up in about the same position, whereas not much is known about what British Home Stores and Arcadia owner and retail billionaire Philip Green would do with Safeway if his joint operation with former Asda Wal-Mart CEO and present British Post boss Alan Leighton would succeed. Taking Wal-Mart's globally dominant position in retailing, one can - as can be read between the lines of Terry Leahy's statement - ask what sense it would make for competition authorities in the United Kingdom to play into the hands of the world's largest retailer, or indeed to the buyout specialists KRK. There must be other considerations that are at least equally much taken into account, including what will happen with the Safeway workers and their jobs.
Morrison is actually the only one of the supermarket traders bidding for Safeway who would not need to worry about the competition authorities. The British press is indeed speculating that the Tesco bid may help Morrison to close the deal and thus protect the leading position of the number one retailer. Today, also Marks & Spencer was reported as considering to make an offer. It is, however, likely that they are interested only in part of the stores which a new owner could be forced by the competition authorities to sell. It has also been said that Tesco would be interested in taking over those smaller Safeway stores, which Morrison has indicated that they would not want to keep. The real vultures descend on London But also real vultures are on the scene, in London. These are the American buyout specialists, who are smelling big money. Kohlberg Kravis Roberts & Co. - KKR - is probably the biggest threat of all to the Safeway workers. Henry Kravis, its main owner, is known from the end of the 1980's as the king of the leveraged buyout. This was at the time when another American buyout king, the king of junk bonds Michel Milken, ran his operation which destroyed numerours savings associations and finally landed himself in jail. Today, KKR is best known for its 31 Billion USD leveraged takeover and subsequent dismantling of RJR Nabisco. In a leveraged buyout, an investor like KKR takes over a company with borrowed money and only limited own funds, using the substance of the take-over object as collateral. Typically, the new property will then be split up or dismantled, spinning off parts of it to lower the debt burden, and to get rid of less profitable or 'non-core' operations. The remainder is then sold, or taken public once again, at a hefty profit compared with the - limited - own investment that was made. Another part of the usual approach is to embark on heavy rationalisation and cost slashing, typically involving major staff cuts, thus increasing the value of the new property. After some time, the company or whatever remains of it is then sold, once again at a high profit. In the Safeway case, it is the workers but also the bond holders who would suffer from a KKR take-over. A heavy debt increase could turn Safeway bonds into junk, and the KKR track record shows that also the Safeway workers would have nothing positive to expect. A Safeway - KKR connection is actually not a new thing. In 1986, KKR bought Safeway Inc., a large US supermarket chain, with 11 stores in the United Kingdom. The British stores where soon sold to Argyll, which took over the Safeway name. Since then, U.S. Safeway and British Safeway have been two different companies even if they share the name. Bookmakers give it to Wal-Mart Also another large US based investment firm is reported to be interested, Texas Pacific. Yesterday, British bookmakers gave Wal-Mart the best odds, but were clearly insecure - whatever can be read into this.
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