Wal-Mart piles on pressure

SAFEWAY has gone through a huge renaissance under the tutelage of its dashing Argentinian chief executive Carlos Criado Perez. But with the shares now 40% below their peak, it will come as no great surprise that the predators are taking a long hard look.

The disclosure in today's Daily Mail that the American retail giant Wal-Mart, owner of Asda, has confidentially asked the Office of Fair Trading to cast an eye over a potential deal will send shivers through the boardrooms of Tesco, which has been rapidly moving into non-food retail, and to a lesser extent Sainsbury's.

When Wal-Mart first came to Britain, at the invitation of Archie Norman and Allan Leighton, who were seeking a white knight to see off the attentions of Geoff Mulcahy's Kingfisher, the share prices of the other supermarkets groups, Tesco and Sainsbury's, were badly hit.

It was feared that Asda's access to Wal-Mart's buying power would mean the end of their hegemony. It didn't quite work out like at first as Wal-Mart was hit hard by senior management departures and the cultural shock of running a European-based company. Gradually, however, Wal-Mart has taken command of its British purchase.

It has replaced Asda's older technology with more modern Wal-Mart systems, taken on Tesco and Sainsbury's over price and moved heavily into new battlegrounds, including beauty products, pharmaceuticals and clothes. Growth has been impressive at about 10% a year, but expansion has been limited by planning laws.

Acquisition of Safeway, which would cost upwards of £2.7bn, would give Asda the sites it needs to raise its game even further. Initial indications from the Office of Fair Trading suggest that the deal would be given the green light, but it would not be straightforward.

There would have to be a region by region, town by town assessment of the effects on local markets before the deal could be agreed, and a combined group would almost certainly have to shed stores in Scotland and the North to ensure consumer choice.

The biggest loser from an Asda-Safeway combination is likely to be Tesco. Wal-Mart, as the biggest global retailer, is able to source much more cheaply in developing countries than any firm in the world. Moreover, it also has greater bargaining power with consumer goods companies such as Procter & Gamble.

An Asda-Safeway deal would be subject to considerable regulatory risks. But in the current bear market, major shareholders are likely to bite off the hand of the buyer - especially if the premium is generous.

Rate letdown

NO ONE can now accuse the Bank of England of hyperactivity. For the 10th consecutive month, the Monetary Policy Committee has held rates at 4%. One trusts that this time around the doves (if there are any left after the departures of Sushil Wadhwani and DeAnne Julius), had the courage to vote for a cut.

The CBI may be sitting on its hands applauding stability but the British Retail Consortium, the Engineering Federation and the TUC are showing no such restraint and advocating lower interest rates.

The idea that there is any clear and present danger from inflation at present is laughable, despite the attempts by the Inflation Report to dream up dragons. The reasons for cutting are plain as a pikestaff.

Activity and prices on the High Street are slipping (as confirmed by the BRC); the Halifax has indicated a flatter housing market, and the mood in the financial markets is grim.

As for the manufacturing sector, it is still suffering from world slowdown. The inflation target of 2.5% was deliberately designed so as not to build a deflationary bias into interest-rate setting. There is no virtue in undershooting the target and risking growth.

Nuclear lifeline

HOPEFULLY there will be no Railtrack 2 at British Energy. Rather than make a dramatic gesture, the Government has learnt the stock market and political lessons of Railtrack and is seeking to carve out a deal with the power generator. But it will now be a tense period for shareholders and there is a possibility of insolvency.

There is to be no direct Government subvention but by allowing BE to take over management contracts from BNFL and offering exclusions from the climate levy, the cash outflow will be stemmed. As part of this deal, BE will be required to scale back its international ambitions and sell down its profitable 50% stake in AmerGen.

All of this means that British Energy's grandiose international ambitions are over.

But it will be better for remaining investors (including 250,000 small shareholders) to be part of a surviving quoted firm, with a financial lifeline and the longer-term prospect of a pick-up in electricity prices, than in administration begging the Government for compensation.