Competition for Safeway, PLC

In mid-January 2003, Walmart, the U.S. leading retailer, announced a bid for Safeway PLC, the fourth largest supermarket chain in the United Kingdom. For Walmart, this move is just the latest in an expansion of its international operations. The huge discount retail company began to look for international opportunities in Mexico, then Canada in the early 1990s. In 1997 Walmart entered European markets in Germany and in 1999 it bought Asda, a UK grocer with 229 stores. More recently, it purchased a controlling interest in Seiyu, a Japanese supermarket operator. (WSJ, January 14, 2003)

The bid by Walmart raises a number of interesting issues. First, Walmart would be one of at least four bidders for Safeway. The other three include Tesco, the largest grocery chain in the U.K., William Morrison Supermarkets, and J Sainsbury PLC, the current number two supermarket firm in Britain. In addition, Kohlberg Kravis Roberts, the Wall Street takeover masters, indicated an interest in Safeway. The result could be a full scale auction for Safeway.

In March 2003, the British government referred the matter to its Competition Commission to assess the impact of the combination of Safeway with any of the three major supermarket chains in the county. An earlier analysis by the U.K. Office of Fair Trading expressed concern over the impact on competition in local grocery markets but also over the possibility that the resulting Big Three chains would have 85 percent of the grocery market in the country. (WSJ, March 20, 2002)

Finally, the merger competition comes at a time when economic conditions are pretty discouraging on all sides of the Atlantic. Safeway's performances in 2002 and in early 2003 were disappointing. In addition, weakness in the U.S dollar may play a role in the attractiveness of any deal. Between the time of the announcement by Walmart on its interest in Safeway and late spring 2003 the dollar-pound exchange rate fluctuated dramatically.

Questions:

Offers by J Sainsbury and William Morrison both are stock deals while Walmart contemplates an all cash offer. What are the implications for Safeway shareholders?

What is the likely impact of multiple bidders for Safeway for that company's shareholders?

What is "the winner's curse" and is there a threat of that problem for Walmart?

What would a two percent swing in the exchange rate mean in an approximately £3 billion deal?

What is the likely impact of the competitive issues raised by the British government on a deal for Safeway and on its shareholders?