French merger news fuels UK's retail rumour mill

News of the merger of France's Carrefour and Promodes raised fresh hopes in Britain of a bid for the likes of Tesco, Sainsbury or Safeway. Shares in Britain's top three food retailers were up by between 2 and 5 per cent against a fall in the wider market on speculation of a new wave of take-over action.

Industry analysts said the share price response was partly knee-jerk, but the sheer size of the French deal had big implications for British supermarkets, particularly market leader Tesco, whose shares were the biggest gainers among the top three players. They stood nearly 5 per cent higher at 1853/4p.

"Tesco finds itself suddenly dwarfed by Carrefour/Promodes in terms of cash-flow and market power," said an analyst. "They must be concerned that if they don't get involved in European consolidation they will soon be left behind."

The London market was already on merger alert after US superstore giant Wal-Mart swallowed Britain's third largest supermarket group ASDA last month. But France's mega-merger, seen as a defence against Wal-Mart, proves the European consolidation bandwagon is starting to roll.

Tesco seems to be top of the British list of potential targets because of its dominant home market position, highly regarded management and ambitions to be a global player. It has already expanded into central Europe and Asia with a hyper-market format, which competes with Carrefour and Wal-Mart.

Analysts said a merger might not be top of Tesco's own agenda, but if the company were to do something, the Carre four/Promodes deal had brought that day closer.

"I think that ideally they'd still like to remain independent," said Mr Clive Black, food retail analyst at Charterhouse Securities. "But I don't think we can rule out corporate activity because of the pace of change," he said. "And ultimately Tesco wants to be part of the top five or six retailers in the world."

A Tesco spokesman pointed to the group's track record overseas. "We are already trading in Europe and we have a very well-established and well-understood strategy for moving into under developed markets and for growing businesses of size."

Analysts said Tesco's low rating relative to its continental peers would make it difficult for the retailer to be aggressive in terms of striking deals.

"Tesco does not look expensive within an international context and therefore could be considered slightly vulnerable perhaps," said another analyst. Possible partners could include Carrefour, which could look to do another deal to get true pan-European scale or Ahold of the Netherlands.

For investors, there is a health warning, however. British retailers, lowly rated by international standards, may have to sell cheap. "Investors would do well to bear in mind that there is a real risk that the UK companies are compelled to sell out on the cheap. We believe ASDA has already done so," said JP Morgan Securities.