Asda plans £2.8bn Safeway bid

TESCO could soon face the challenge of a supermarket group that can match it for muscle. The owner of Asda is said to be secretly plotting a £2.8bn takeover of Safeway.

The combined group would have a 25% market share, putting it head to head with Tesco, currently Britain's biggest supermarkets chain. For shoppers, the merger could trigger a further price-cutting war. However, there would also be likely to be closures in areas where Safeway and Asda stores overlap.

Behind the takeover plan is the American giant Wal-Mart, Asda's owner since 1999. Wal-Mart has been secretly sounding out the Office of Fair Trading to see whether the deal would be allowed, the Daily Mail has revealed. The competition regulator has not rejected the plan outright, but will insist some stores are sold in regions where the combined group would have a very large market share.

There is a huge overlap between the two, for example, in Scotland and the North of England.

A price war among supermarkets has been raging since Wal-Mart's arrival in Britain in 1999. In the run-up to last Christmas, Tesco threw down the gauntlet to Asda, as well as stores such as Comet, by cutting up to £100 off TVs and videos.

As the battle grew more desperate, Tesco's rivals sought an investigation into its Price Check promotion, which they said misled customers. It followed an admission by Tesco that it had raised the price on non-promotion lines as the deal began.

In the latest round of the war, Asda slashed the price of petrol at its stores, cutting nearly 5p a gallon off unleaded. Tesco followed, lopping up to £1 off a gallon depending on how much customers spend in store.

An enlarged Asda could offer the consumer even cheaper prices, not just for food, but for beauty products and clothing too.

Asda was built up by Conservative grandee Archie Norman and Royal Mail chairman Allan Leighton, who both left after the takeover. It has since gone from strength to strength.

Wal-Mart is the world's biggest retailer with annual sales of more than £140bn. It has massive purchasing power and can buy goods very cheaply from Asia and developing nations.

Asda's cut-price deals are attracting lots of extra customers and its sales are rising by more than 10% a year. But it needs to open many more stores to catch up with Tesco and Sainsbury's. This is difficult because of planning regulations.

With 480 stores and 90,000 staff, Safeway is Britain's fourth biggest retailer. Its market share, which has been falling, is around 10%. Asda is the third largest food retailer, with a share of around 15%. It has 245 very large stores and employs 109,000 staff. Tesco has 729 UK stores, while Sainsbury's has 463. Both Asda and Tesco are slugging it out to sell more 'non-food' goods such as clothing and electricals. Sainsbury wants to focus on food.

Safeway is now valued at £ 2.1bn. But to win shareholder approval, Wal-Mart would need to pay at least £2.8bn, analysts estimate.

More than 100m customers visit a Wal- Mart store each week. The company employs 1.3m worldwide.