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MARKET COMMENT
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William Morrison (LSE: MRW) first said it was interested in buying Safeway (LSE: SFW) back in January this year. Today, the bid process reached its final stage with the announcement of its second offer, which values Safeway at £3b. The deal values each Safeway share at 283p, of which 60p will be paid in cash and the balance in Morrison shares. Through the acquisition of Safeway, the northern-based grocer will, in one fell swoop, increase the size of its footprint across the UK from just 72 stores to 552 outlets. This is after it sells 52 Safeway stores to rivals that include Tesco (LSE: TSCO), Sainsbury (LSE: SBRY) and Asda to satisfy the competition authorities. As a result of the purchase, Morrison will lift its total retail space from 4m square feet to about 13m square feet. The actual price that Morrison pays for Safeway, whilst obviously important, is not really that critical, though. Morrison will be paying £14 for every pound of profit that Safeway is expected to make this year. That is about right for a food retailer, and is less than its own valuation of 18 times prospective earnings. However, the key to the purchase will be how Morrison will sweat its newly acquired Safeway assets. Morrison is one of the most efficient grocers in the UK. It generates about £940 of revenue for every square foot of space owned. That compares very favourably with Safeway, which is some 13% less efficient. Additionally Morrison is much better at generating profits too. Its operating margin of 6.1% is about a third higher than Safeway's margin of 4.6%. The acquisition of Safeway by Morrison will certainly put the cat amongst the pigeons in the grocery market. However, acquisitions are never plain sailing even in industries as simple as retailing. A quick look at the ill-advised purchase of Kwik-Save by Somerfield (LSE: SOF), for example, shows what can go wrong. For that reason, I am happy to steer clear of Morrison until there is some evidence that the merger has been successful.