'Storming' figures give Morrisons extra firepower as battle rages for Safeway

Sir Ken admits errors in strategy, but strong sales show he has not taken his eye off the ball

Sir Ken Morrison was in his usual defiant mood yesterday. The plain-speaking chairman of William Morrison was bullish about his chances of winning the £3bn bid battle for Safeway and confident he could prove his City doubters wrong. By the way, he was saying, here's a 14 per cent increase in profits to £276m to show we haven't taken our eye off the ball.

The full-year figures were, as one analyst put it yesterday, "storming". Like-for-like sales in current trading are up 7.6 per cent on the previous year. Margins are up, and there is even more cash on the balance sheet than analysts expected. "We are not depressed," Sir Ken said. "We know we can do a job on Safeway."

But the next week will provide the biggest test of the 71-year-old's distinguished career. The Department of Trade and Industry is due to rule on the five Safeway bids either later this week or early next. By then the veteran supermarket operator will know whether his huge gamble has paid off or not.

If Morrisons' bid is cleared but the rival offers from Tesco, J Sainsbury and Wal-Mart are referred to the Competition Commission, the Bradford-based group will have a sizeable advantage. Only the retail entrepreneur Philip Green, who has so far made an indicative bid, not a formal offer, would be in the same position if his bid is also cleared.

So far, though, it has been a baptism of fire for Sir Ken, whose analyst conference call yesterday was the company's first in its 37 years on the stock market. Even that was cut short when it emerged that he had gone off for "a comfort break".

Asked yesterday whether he regretted the bid for Safeway, which has caused a sharp drop in Morrisons' share price, Sir Ken said: "No. It's been a very good learning exercise. This thing is not yet over. And to be involved in the reshaping of the industry has been very important. It'll be an interesting week."

Pressed as to what exactly he had learnt, he said: "Many aspects of the way the City works. It's been a revelation to myself and my colleagues."

Sir Ken admitted, though, that the collapse in Morrisons' shares as soon as the bid was announced had caught him by surprise. "I've been disappointed by that. But I think the numbers here [the full-year results] show that we are still going strong. It [the fall] is rather more than I expected. But that's an error of judgement on my part."

Analysts believe his advisers (ABN Amro) were also at fault. "I think he was badly advised on day one about the impact on the share price," one said.

Sir Ken admits that mistakes were made as this ultra-conservative company, which last made an acquisition in 1978, suddenly kick-started the biggest takeover battle of recent years.

"We were guilty of surprising them," Sir Ken says of his shareholders' reaction. "We regarded ourselves as a pretty boring company and they valued that. We probably under-estimated how highly they valued it."

He has not, however, been tempted to take a bet on his own company's chances at the rather long odds being attributed to him by the bookies (currently 7-1). "I'm not a betting man. I prefer to keep my money in my back pocket."

The other issue is how much more Morrisons might have to pay if it is to land its prize. With Morrisons' shares edging only a penny higher yesterday to 167.5p, its all-share offer for Safeway was worth just 221p a share. This is well short of Safeway's closing price of 291p yesterday as the market reacted to news of a possible share raid by Wal-Mart. Morrisons knows it will have to add a cash element to its offer – possibly around £1 a share. But the risk is that this will only depress the Morrisons share price further.

Analysts say Sir Ken will have thought all this through. "It would be silly to fall at the final hurdle," one said. "He will know what he has to do."

Morrisons figures yesterday showed net cash of £165m, giving the company substantial firepower to raise its Safeway offer. Asked yesterday whether he was happy to gear his company up, Sir Ken said: "We would be, not happy, but prepared to do whatever is necessary."

He says the publicity surrounding the bid battle has been good for Morrisons' sales and that the challenge will be to retain those new customers. "We have had a lot of letters saying, 'We hope you win, and if you do, can we have one of your stores near us?' We have also had a lot of letters from potential non-executive directors, but that's another story."

This is a reference to Sir Ken's commitment to appoint non-executive directors for the first time if his bid for Safeway proves successful. Sir Ken says he is not against things like the Higgs review on non-executive directors but that he is a "little bit concerned about what the benefits are".

Interestingly, "higg" is an old Yorkshire word meaning temper, annoyance, or to take offence at something. It is thought to derive from the old Norse word hoggva, and its Yorkshire meaning may well be close to Sir Ken's view of the Higgs report.

But as the Safeway bid enters its next phase, Sir Ken and his team will keep doing what they have always done, running the business in a simple, straightforward way. The progress was there to see in yesterday's figures. Margins were up from 6.2 per cent to 6.4 per cent, helped by the group's unique vertical integration (it operates its own abattoirs, processing and packing plants). Non-food sales have been rising strongly from a low base and now account for around 7 per cent of the group's £4.3bn sales.

As one analyst observed, "This was Morrisons putting its best foot forward. They are saying that if they don't get Safeway their figures are strong enough to deliver growth, and the pipeline of new stores is there. They are also saying that if we do get it, we've got more cash than you thought we had. Normally you'd be upgrading your forecasts and seeing the share price rise."

Several analysts now see Morrisons as the dark horse in the Safeway race. "It suits the regulators, it suits customers and it suits suppliers," one said. "It's the bid no one objects too."