Somerfield walks down the aisle with the Co-Op

Consolidation continues apace in the UK food retail sector. Yesterday the Co-op (a mutual owned by its 2.5 million members) acquired Somerfield (owned by a private equity fund) for £1.57bn in an example of horizontal integration designed explicitly to give the Co-op the opportunity to achieve greater economies of scale across its business. The combined market share of the newly merged business will be around 8% - less than half the share enjoyed by each of the next biggest retailers Sainsburys and Walmart (Asda).

Consolidation
It is a sign of the times that had the Co-op made a move to buy Somerfield this time last year they would have spent probably at least another £1 billion on the acquisition. The Financial Times reports that Somerfield’s owners - Apax Partners, Barclays Capital, Robert Tchenguiz, the property tycoon, and Kaupthing, the Icelandic bank - took the chain private for £1.2bn including debt in 2005 - in the interim the private equity group managed to reduced debt from £1.4bn to £800m by selling off the Kwik Save chain and some of Somerfield’s property portfolio.

What does the Co-op get for its money? Approximately 880 local grocery retail outlets across the UK and a business that last financial year generated net sales of £4.2bn, and earnings before interest, tax and depreciation of £233m. Perhaps more importantly, the acquisition appears to give the Co-op market leadership in the convenience food retail sector though that position is under threat from the smaller-store formats being rolled out by the major players.

Most mergers and takeovers are justified on the grounds of economies of scale and synergies - the Co-ops’s press release doesn’t disappoint!

”“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.”

To avoid the competition authorities bearing their teeth, the Co-op is likely to have to sell (divest) around 100-120 stores to avoid local competition issues.
Of greater interest will be how a business steeped in the principles of the co-operative movement and latterly ideals of Fair Trade will merge seemlessly with a retailer that has had five years of stringent private equity management.