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Now it’s the Big Five

Group’s Somerfield swoop doubles retail share to 8%

July 24 2008

In what is set to the biggest acquisition in co-operative history, the Co-operative Group’s £1.565 billion bid for Somerfield has been accepted.

Following months of speculation the deal was agreed last week between the two retailers, which will double the Group’s market share to eight per cent making it a strong fifth player in the grocery industry and cement its position as the UK’s leading convenience store operator.

The deal is conditional on approval by the Office of Fair Trading, which is estimated to be completed by September. It is expected around 100 stores will be off-loaded due to local competition concerns.

A number of retailers have already shown an interest in acquiring a number of those stores, according to the Group. However, some of the retailer’s larger stores will also be under scrutiny according to Peter Marks , Chief Executive of the society.

He said the Group’s focus is primarily on convenience retailing and medium-sized supermarkets (from 3,000 sq ft to 15,000 sq ft), so it will be reviewing whether to keep the larger stores on a “case-by-case basis”.

The Group bought Somerfield for £1.565bn on a cash-free debt-free basis with its owners — a consortium of Apax Partners, Barclays Capital, Robert Tchenguiz and Kaupthing — dropping the price tag from £2.5bn.

In the year to April, Somerfield generated net sales of £4.2bn, and earnings before interest, tax and depreciation of £233m. At the year end net assets totalled £1.3bn. The combined Co-operative Group’s food business will operate more than 3,000 grocery stores and generate net sales of about £8bn.

Welcoming the deal, Group Chair Len Wardle said: “This is great for our business and in my view propels us back to the Premiership of food retailing. People talk about the Big Four, I hope people will soon talk about the Big Five. It is good news for our members and for competition in the grocery market where we will create a stronger fifth player in food and a convenience store chain with unrivalled geographic reach.”

Peter Marks added: “For the Co-operative Group this is a transformational deal — cementing our position as the UK’s premier community retailer and helping us significantly as we lead a renaissance of the Co-operative brand. Together, The Co-operative and Somerfield colleagues will be better placed than ever before to provide consumers with great choice, value and service.

“There is a strong strategic fit between the two businesses, with both focused on the highly competitive top-up and convenience shopping market. We anticipate real cost and revenue synergies, enabling us to enhance still further the overall value we deliver to our customers.”

No time-line has been revealed by the Group for the Somerfield stores to be brought under The Co-operative brand, although Mr Marks told the News its three year plan to increase sales and double profits through acquisitions and refurbishing stores will be revisted.

Said Mr Marks: “Buying Somerfield effectively accelerates that plan; it does not displace it or detract from it. Our ambition is to cement our position as the UK’s premier community retailer and the plan is focused on transforming our estate under a single unified brand.

“The main focus now will be on integration of Somerfield and the wider transformation of our estate under a single brand. With the significant capital we have in place for the store fit out programme, buying Somerfield means we can be very focussed on that process, rather than searching for bolt-on acquisitions.”

The Group said it will be running the retailer as a separate business from Somerfield’s Bristol base, which employs 800 people, for the next 12 months. However, the Group said it is too early in the process to make major decisions about the site’s future. The current Somerfield team led by Chief Executive Paul Mason will stay in place for at least three months post-completion to ensure a smooth handover of the business.

Mr Marks added: “We have been impressed with a lot of what we have seen in the Somerfield business and its people. The important thing to remember, however, is that in the longer term this will be about job creation. We are buying Somerfield as part of our three-year growth plan under which we plan to increase sales and double profits.

“We have done a significant amount of work on planning the integration of the two businesses. We are seeking to adopt a best of the best approach with respect to the integration process but do not wish to comment on specific matters until we own the business.”

Paul Mason, Chief Executive of Somerfield, said: “The Co-operative Group and Somerfield have a similar focus in terms of customers, store types, product ranges and business vision. Our shared vision of providing a high quality and affordable convenience offer to local communities means that together we will be twice as strong and therefore twice as able to deliver the local grocery shops British customers demand.

“Over the last two years we have transformed every aspect of Somerfield, a significant achievement, and as a result we are now trading from a position of strength. With Somerfield and The Co-operative Group as one business we believe that we can learn from each others strengths to ensure we continue to develop the best local grocery shops in Britain.”

The transaction will be financed through committed bank facilities underwritten by Barclays, Lloyds TSB Corporate Markets and The Royal Bank of Scotland with significant funding also provided by Bank of Ireland and The Co-operative Bank.

Financial advisers to The Co-operative Group were Credit Suisse (lead financial adviser) and RBS/ABN Amro Corporate Finance (joint financial adviser). HSBC were also financial advisers. Citi were advisers to Somerfield.

Category: Retail Societies

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