Proposed acquisition by Trackdean Investments Limited of Safeway plc

No. ME/1058/03

A report under section 125(4) Fair Trading Act 1973 on the advice given on 13 March 2003, to the Secretary of State for Trade and Industry under section 76 of the Act

JURISDICTION

The merger satisfies the assets test of the Act as the gross assets to be acquired were valued at £4.9bn in Safeway's last annual accounts. The European Community Merger Regulation does not apply as both Trackdean and Safeway achieved more than two-thirds of their aggregate 2002 Community turnover in one and the same Member State, ie, the United Kingdom.

PARTIES

Trackdean Investments Limited (Trackdean) is an investment vehicle owned by Philip Green and his family, established for the purpose of this transaction. It has never traded. Philip Green and his family also control the department store chain BHS and the clothing retail group Arcadia.

Safeway plc (Safeway) is the fourth largest grocery retailer in the UK with 479 stores. In the year ending 30 March 2002, Safeway earned a pre-tax profit of £355m on net turnover of £8.72bn. Its gross assets as at 30 March 2002 were £4.899bn.

TRANSACTION

Trackdean proposes to make a cash offer for the entire issued share capital of Safeway, funded through a combination of equity and medium- and long-term debt finance. The merger in contemplation for the purposes of the Act is therefore Trackdean's proposed acquisition of the whole of Safeway.

OVERLAPS IN THE RELEVANT ECONOMIC MARKETS

Product market overlaps between Safeway and businesses controlled by the owners of Trackdean are limited. There is virtually no overlap in the sale of clothing or clothing accessories, key components of the offering in both the Arcadia stores and BHS. There is an overlap between Safeway and BHS in products for the home, but the shares of supply remain very small. There are also likely to be some other minimal overlaps in products such as toiletries and the provision of an in-store cafe, but shares of supply in such areas will be minimal.

The geographic market for both Safeway and BHS/Arcadia is likely to have both national and local dimensions. 

Safeway would remain a competitor within the supermarket sector. Furthermore, Trackdean believes that Safeway is underperforming and that it will be able to improve Safeway's competitive offering. If successful, Trackdean has argued that this could increase competition within the supermarket sector.

PORTFOLIO EFFECTS

The merger results in stores controlled by Trackdean's owners having a presence in a wide variety of retail environments. This brings the possibility of portfolio effects, with customers being encouraged to make purchases in all of the various outlets through linked discounting etc. It is unlikely, however, that this would lead to consumer detriment in this case, as none of the relevant brands is likely to be considered a 'must have' by consumers.

BUYER POWER

Buyer power does not raise concerns due to the absence of increment to buying power in grocery items. There is likely to be some accretion to buyer power with respect to the buying of home wares and toiletries, but this is unlikely to be of any concern due to the small shares of the parties in overall sales of these products.

THIRD PARTY CONCERNS

Third parties have stated their concerns regarding the high gearing of Safeway post-merger. The bidder is, however, putting up the finance itself, following a model already used successfully in the acquisition of Arcadia. It is reasonable, therefore, to accept that gearing will be sustainable.

Concerns from third parties have also arisen regarding the possibility of the break-up of the Safeway business as a result of the Trackdean bid. Such a move is not considered here and if it occurs subsequently it will be considered separately under the Act. 

Third parties have also raised concerns that post-merger Safeway would exit the supermarket sector. However, we note that Trackdean has made a commitment to continue to operate Safeway as a grocery business; Safeway is a profitable business; and the value of assets to some extent lies in their use as grocery retail outlets (with the required planning consents). For these reasons we are not convinced that exit is sufficiently certain for us to take this into account.

RECOMMENDATION

This acquisition qualifies for investigation on the gross assets test. Product market overlaps are minimal and portfolio power and buyer power issues do not raise any concerns. Third party comments that the gearing would be unsustainable and that Safeway would exit the grocery sector as a result of the merger have been refuted by Trackdean and do not appear to raise any competition concerns. Any on-sales (as mooted by third parties) would be considered separately to this investigation. Therefore, no competition concerns are raised by this merger.  On these grounds, we recommend that this merger is not referred to the Competition Commission.

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