Safeway PLC
24 January 2003
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN, INTO OR FROM THE UNITED STATES,
AUSTRALIA, CANADA OR JAPAN
For immediate release
24 January 2003
Safeway plc
Property valuation - £2 billion surplus equivalent to additional 184p per share
The board of Safeway is today announcing the valuation of 201 of Safeway's
stores, which it believes is relevant to Safeway Shareholders in assessing the
all share offer by Morrisons and any offer that may be announced by Sainsbury's,
Wal-Mart, KKR, Philip Green, Tesco or any other party.
David Webster, Chairman of Safeway, today commented:
'This property valuation, with its £2 billion surplus, underlines the
substantial value within Safeway's store portfolio. We would expect our
shareholders to benefit from this under the terms of any proposal.'
Safeway's store portfolio
Safeway has a strategically valuable portfolio of 479 stores:
• over three quarters of the 10.5 million square feet selling area is
freehold or ground lease;
• 75 per cent. of Safeway's selling space is in stores of 20,000 square feet
or over;
• planning permissions or resolutions to grant planning permission have been
obtained for extensions that will create another 27 hypermarkets and for 36
other extensions, which will increase sales area by over 700,000 square
feet; and
• given the current planning constraints on new store development, this
valuable portfolio cannot now be replicated.
The board of Safeway believes that there is significant value in the group's
store portfolio that is not reflected in the current book value. In order to
confirm this, in October 2002, Safeway commissioned DTZ, an independent valuer,
to produce an existing use valuation for 201 of Safeway's stores, out of its
total portfolio of 479 stores. The majority of the 201 stores that have been
valued are freehold and they have a total selling area of 5.8 million square
feet out of a total Safeway Group selling area of 10.5 million square feet. The
stores selected consisted principally of larger stores, together with certain
smaller stores which the board of Safeway considered among the most valuable
stores within the Safeway portfolio.
The DTZ valuations of these 201 stores amount to £4,504 million. These
valuations reflect their opinion of the market value of these stores on an
existing use basis, which ignores the value of any alternative uses for the
stores. A valuation report from DTZ summarising these valuations is attached as
Appendix I to this announcement. This compares to a current net book value for
those stores of £2,561 million, giving a surplus over net book value for those
stores of some £1,943 million or 184 pence per share. Safeway's current net
asset value, before such surplus, is 207 pence per share.
The current net book value of the remaining 278 stores, which have not been
subject to an independent valuation, is £962 million. Of these stores, 141 are
held on a freehold or ground lease basis. In addition, Safeway has non-store
assets, including sites, developments in progress, a freehold head office and
four million square feet of distribution centres, 60 per cent. of which are
freehold, have a current net book value of £565 million. Shareholders should
note that, given that no independent valuation has been undertaken on these
stores and the non-store assets, no conclusion can be drawn in relation to the
possible existing use value, or any difference to net book value, attributable
to them.
Number of Net Book Value DTZ Valuation Surplus
stores
(£ million) (£ million) (£ million)
201 Stores valued 2,561 4,504 1,943
278 Residual stores 962
Other non-store 565
assets
479 4,088
It is not Safeway's intention to dispose of any of these stores. However, the
estimated amount of tax on chargeable gains that would be payable if the 201
stores which have been subject to the valuation were sold at their existing use
value of £4,504 million is approximately £500 million (to the nearest £100
million). This calculation relates only to the tax on potential gains. It takes
no account of the tax position of any potential offeror that may reduce the tax
on any such gains.
Enquiries
Safeway Tel: +44 (0)20 8848 8744
David Webster
Simon Laffin
Steve Webb
HSBC
Rupert Faure Walker Tel: +44 (0)20 7992 2101
Aidan Wallis Tel: +44 (0)20 7992 2453
Schroder Salomon Smith Barney Tel: +44 (0)20 7986 4000
Robert Swannell
David Wormsley
Ian Hart
Brunswick Group Limited Tel: +44 (0)20 7404 5959
James Bradley
Timothy Grey
The information relating to the valuation of Safeway's portfolio set out above
should be read in conjunction with DTZ's report summarising their valuations of
201 stores set out in Appendix I and, in particular, the assumptions and sources
of information set out therein.
HSBC Bank plc, which is regulated in the United Kingdom for the conduct of
investment business by The Financial Services Authority, is acting for Safeway
and no one else in connection with the matters described in this announcement
and will not be responsible to anyone other than Safeway for providing the
protections afforded to customers of HSBC Bank plc nor for providing advice in
relation to the matters described in this announcement.
Schroder Salomon Smith Barney is acting for Safeway and no one else in
connection with the matters described in this announcement and will not be
responsible to anyone other than Safeway for providing the protections afforded
to clients of Schroder Salomon Smith Barney or for providing advice in relation
to the matters described in this announcement.
The release, publication or distribution of this announcement in certain
jurisdictions may be restricted by law and therefore persons in such
jurisdictions into which this announcement is released, published or distributed
should inform themselves about and observe such restrictions.
APPENDIX I
DTZ VALUATION
Safeway plc
6 Millington Road
Hayes
Middlesex
UB3 4AY
24 January 2003
Gentlemen,
VALUATION OF A PORTFOLIO OF 201 SAFEWAY PLC PROPERTIES
INTRODUCTION
In accordance with our instructions confirmed in your letter dated 14 November
2002 received from Safeway plc (the 'Company'), we have inspected 201 properties
owned and occupied by the Company (the 'Properties' or the 'Portfolio') that
form part of a larger portfolio of properties occupied by the Company, in order
to provide existing use values for each of the Properties. The Properties
comprise 187 freehold/heritable, 11 leasehold and 3 part freehold/part leasehold
properties. The date of valuation is 21 November 2002 and the valuations were
reported to the Company on 5 December 2002.
We confirm that the valuations have been made in accordance with the appropriate
sections of the Practice Statements and Guidance Notes contained within the
Appraisal and Valuation Manual, Third Edition, Amendment 14 (the 'Manual')
issued by the Royal Institution of Chartered Surveyors (the 'RICS') save as set
out below in this paragraph, and that they have been undertaken by valuers,
acting as external valuers, as defined in Practice Statement 5.3.2, qualified
for the purpose of the valuations. In accordance with your instructions relating
to the commercial sensitivity of publishing individual property values and
descriptions and addresses of the Properties, we have not included such
information within this report. Only in so far as these matters of disclosure
are concerned, is this valuation report non-compliant with the Manual.
The value reported below reflects the aggregate of the individual valuations of
each of the Properties.
Where appropriate, elements of this report refer to economics, planning and
accounting matters which have been prepared in conjunction with DTZ Pieda
Consulting.
The Company has received planning consent to extend 49 of the Properties
totalling some additional circa 540,000 sq ft of sales area. The valuations do
not take account of the impact on future earnings resulting from the potential
increase in sales area of the Properties.
We confirm that the valuations have been prepared in accordance with the City
Code on Take-overs and Mergers. We have not been instructed to value the
entirety of the Company's property holdings.
This Report is intended for Safeway plc's use only, including for use in
connection with any offer for Safeway plc.
It is confirmed that DTZ Pieda Consulting is retained by the Company to act for
them in respect of planning matters. In addition we have previously undertaken
valuation work for the Company.
The Properties were subject to internal and external inspections between 18th
October 2002 and 8th November 2002.
PORTFOLIO OVERVIEW
Portfolio Overview
The Portfolio comprises 201 retail properties occupied by the Company. The
Properties are generally located in good trading locations within regional or
sub-regional centres.
Tenure
Tenure Number of Properties
Freehold/Heritable 187
Long leasehold 4
Part freehold/part leasehold 3
Short leasehold 7
Total 201
Type of Store
Type of Store Number of Properties
Hypermarket 5
Superstore 179
Supermarket 16
Convenience 1
Total 201
Location
Region Number of Properties
East Anglia 8
East Midlands 18
Greater London 13
North 11
North West 13
Scotland 34
South East 34
South West 27
Wales 10
West Midlands 26
Yorkshire and Humberside 3
Non mainland 4
Total 201
The Properties range in size from approximately 1,208 sq m (13,000 sq ft) to
5,946 sq m (64,000 sq ft.).
BASIS OF VALUATION
Existing Use Value
The value of the Properties has been assessed in accordance with the relevant
parts of the current RICS Appraisal and Valuation Manual. In particular, we have
assessed Existing Use Value in accordance with Practice Statement 4.3. Under
these provisions the term 'Existing Use Value' means an 'opinion of the best
price at which the sale of an interest in property would have been completed
unconditionally for cash consideration on the date of valuation, assuming:
a. a willing seller;
b. that, prior to the date of valuation, there had been a reasonable period
(having regard to the nature of the property and the state of the market)
for the proper marketing of the interest, for the agreement of the price and
terms and for the completion of the sale;
c. that the state of the market, level of values and other circumstances were,
on any earlier assumed date of exchange of contracts, the same as on the
date of valuation;
d. that no account is taken of any additional bid by a prospective purchaser
with a special interest;
e. that both parties to the transaction had acted knowledgeably, prudently and
without compulsion;
f. the property can be used for the foreseeable future only for the existing
use; and
g. that vacant possession is provided on completion of the sale of all parts of
the property occupied by the business.'
Assumption (d) has particular regard to the special position of a sitting tenant
with an advantageous lease, or an adjoining owner.
In undertaking our valuations, we have not made any adjustment to reflect any
liability to taxation that may arise on disposal of any of the Properties, nor
for any costs associated with such disposals incurred by the owner. No allowance
has been made to reflect any liability to repay any government or other grants,
taxation allowance or lottery funding that may arise on any disposal.
In undertaking our Existing Use valuations we have made deductions to reflect
purchaser's normal acquisition costs.
Methodology Overview
The Properties have been valued as fully operational businesses and our
valuation therefore reflects the income derived from the operation of the
Properties.
The Manual requires that the valuation of operational properties is calculated
by reference to their trading potential, and that it specifically excludes any
goodwill associated with the management of such properties.
The Properties are of a nature normally sold as fully equipped and operational
entities, and as such have been valued by reference to their trading potential
to include:-
• The land and the buildings;
• Trade fixtures, fittings, furniture, furnishings and equipment;
• The market's perception of the trading potential excluding personal
goodwill, with an assumed ability to renew existing licences, consents,
registrations, permits and certificates. Consumable stocks have been
excluded.
Trading projections have been based on the assumptions that:
• The businesses will at all times be effectively and competently managed,
operated and promoted;
• The businesses will be properly staffed, stocked and capitalised; and
• In undertaking a valuation by reference to trading performance, we have
been provided with and reviewed the trading accounts for current and
previous years.
As with all classes of property valued by reference to trading potential, the
underlying value of the property asset can fluctuate to a greater degree when
that trading potential is altered, either up or down, than is normally the case
with most other types of commercial property.
At a number of the Properties there are adjoining or adjacent buildings
producing small elements of income from areas which are let/sublet to third
party tenants. The total rental income amounts to circa £4m per annum. As this
is not material to the valuation of the Portfolio we were instructed not to
carry out detailed inspections and have accordingly excluded this element of
value from the total. In the event of contemplation of a sale of an individual
property this element of value would need to be assessed.
We have not considered at this stage whether by applying Open Market Value as a
basis of valuation this would give rise to a materially different number to
Existing Use Value.
Individual properties
Our capital valuations relate to each of the Properties on an individual basis
and it should be noted that there could be addition to, or reduction in, the
aggregate of those individual values if all the Properties were to be included
in a single sale or if certain of the Properties were to be sold in groups.
VALUATION METHODOLOGY
Supermarket operators have historically determined bid values for purchasing
properties and new store locations using cashflow appraisal models based on the
potential trading performance of the property.
We have valued each of the Properties using a cashflow evaluation appraisal
cross-referenced against the following:
• an assessment of potential bidders and existing local competition;
• a physical inspection;
• an economic assessment; and
• a planning appraisal.
The Properties have been valued on this basis because it is considered that this
approach reflects that which potential purchasers would take.
ASSUMPTIONS AND SOURCES OF INFORMATION
In undertaking our valuations, we have made a number of assumptions and have
relied on certain sources of information. These are detailed in the following
section. Where appropriate, the Company has undertaken its own enquiries and has
confirmed that our assumptions are correct so far as it is aware. In the event
that any of these assumptions prove to be incorrect then the value of the
Properties could vary from the valuations provided in this Valuation Report. The
assumptions are referred to below:-
Title
We have not had access to the title deeds of the Properties. In accordance with
our instructions, we have assumed that the Company is possessed of good and
marketable freehold, heritable and/or leasehold title in each case and that the
Properties are free from rights of way or easements, burdens, servitudes,
wayleaves, restrictive covenants, disputes, restrictions on development or
onerous or unusual outgoings. No account has been taken of any mortgages,
standard securities, debentures or other security which may now or in the future
exist over any of the Properties.
Condition of structure and services, deleterious materials, plant and machinery
and goodwill
Condition surveys have not been undertaken, nor have woodwork or other parts of
the structures which are covered, unexposed or inaccessible, been inspected.
Therefore, we are unable to report that the Properties are structurally sound or
are free from any defects. We have assumed the Properties are free from any rot,
infestation, adverse toxic chemical treatments, and structural or design defects
and that the services are functioning satisfactorily. Our valuations have taken
into account the general condition and age of the Properties as observed from
the inspections of the Properties.
We have not arranged for investigations to be made to determine whether high
alumina cement concrete, calcium chloride additive or any other deleterious
material have been used in construction or any alterations, and therefore we
cannot confirm that the Properties are free from risk in this regard. For the
purpose of these valuations, it has been assumed that any investigation would
not reveal the presence of such materials in any adverse condition.
No mining, geological or other investigations have been undertaken to certify
that the sites are free from any defect as to foundations. We have assumed that
the load bearing qualities of the site of each the Properties are sufficient to
support the buildings constructed thereon. We have assumed that there are no
abnormal ground conditions, nor archaeological remains present, which might
adversely affect the present or future occupation, development or value of any
of the Properties.
No tests have been carried out as to electrical, electronic, heating, or any
other services nor have the drains been tested. However, we have assumed all
services to be functioning satisfactorily.
We have assumed that basic fixtures, fittings, furniture and furnishings are
transferred with the Properties. We have excluded from the valuations vehicles,
stock and loose tools. Further, no account has been taken in our valuations of
any goodwill that may arise from the present occupation of the Properties.
It is a condition of DTZ Debenham Tie Leung Limited or any related company, or
any qualified employee, providing advice and opinions as to value, that the
client and/or third parties (whether notified to us or not) accept that the
valuation report in no way relates to, or gives warranties as to the condition
of the structure, foundations, soil and services of any of the Properties.
Environmental matters
We have made enquiries of the Company in each case, in order, so far as
reasonably possible, to establish the potential existence of contamination
arising out of previous or present uses of any of the sites occupied by the
Properties and any adjoining sites. The Company has confirmed to us from its own
enquiries and knowledge of the Properties that it is not aware of any
environmental matters that are material to the valuations.
We have assumed that the information and opinions we have been given are
complete and correct in respect of the Properties and that further
investigations would not reveal more information sufficient to affect value. We
consider that this assumption is reasonable in the circumstances.
Our enquiries and inspections have provided no evidence that there is a risk of
the presence of contamination at, in or under any of the Properties that is
sufficient to affect value. Accordingly, you have instructed us to assume that
no contamination or other adverse environmental matters exist in relation to the
Properties sufficient to affect value. Other than as referred to above, we have
not made any investigations to establish whether there is any contamination or
potential for contamination to the Properties. Commensurate with our assumptions
set out above we have made no allowance in these valuations for any effect in
respect of actual or potential contamination of land or buildings. A purchaser
in the market might, in practice, undertake further investigations. If it is
subsequently established that significant contamination exists at any of the
Properties or on any neighbouring land, and such contamination is migrating
onto, or otherwise adversely affecting any of the Properties, that causes or is
likely to cause significant harm to the environment or water pollution, or that
the premises are being put to any contaminative use, then this would reduce the
values now reported.
Floor areas
The Company has provided us with the floor areas of the Properties that are
relevant to our valuations. As instructed, we have relied on these areas and
have not checked them on site. We have assumed that the floor areas supplied to
us have been calculated in accordance with the current Code of Measuring
Practice, prepared by the Royal Institution of Chartered Surveyors.
Statutory requirements and planning
It has been assumed that the buildings have been constructed in full compliance
with valid town planning and building regulations approvals, that where
necessary they have the benefit of a current Fire Certificate, and that the
Properties are not subject to any outstanding statutory notices as to their
construction, use or occupation. No allowance has been made for rights,
obligations or liabilities arising under the Defective Premises Act 1972, and we
have assumed that the Properties comply with all relevant statutory
requirements.
It has been further assumed that the existing use of each Property is duly
authorised or established and that no adverse planning condition or restriction
applies.
We understand that all licenses, consents and approvals necessary for each asset
are in place.
Food Safety Act 1990
In accordance with our instructions, we have assumed that the Properties have
been registered and comply with the regulations. No account of the cost of
compliance has been allowed for within the valuations.
Landlord And Tenant Act 1987
Where this is applicable we have assumed that necessary notices have been given
to the residential tenants under the provisions of the Act, and that such
tenants have elected not to acquire the freehold or head leasehold interest, and
therefore disposals into the Existing Use are unrestricted.
Occupational Leases
In those instances where the Company has a leasehold interest we have relied on
the information provided to us by the Company in respect of the lease details.
Information
We have assumed that the information the Company and its professional advisers
have supplied to us in respect of the Properties is both full and correct.
It follows that we have assumed that details of all matters likely to affect
value within their collective knowledge have been made available to us and that
the information is up to date.
EBITDA and Commercial Information
The Company has provided to us financial information including EBITDA and
turnover information for the two years ended March 2002. In addition the Company
has also supplied financial information for the period March 2002 to end October
2002. We have relied on the financial information provided by the Company. We
have conducted a sample verification and check of information provided by the
Company and are satisfied on the basis of this limited exercise that we have no
reason to consider that information provided by the Company is other than
materially accurate.
Taxation
In undertaking our capital valuations, we have not made any adjustment to
reflect any liability to taxation that may arise on disposal of any of the
Properties, nor for any costs associated with such disposals incurred by the
owner. No allowance has been made to reflect any liability to repay any
government or other grants, taxation allowance or lottery funding that may arise
on any disposal.
In undertaking our existing use valuations, we have made deductions to reflect
purchaser's normal acquisition costs where appropriate.
VAT
We are not aware whether the Company exercised its option to tax in respect of
the Properties.
The capital valuations included in this report are all net of value added tax at
the prevailing rate.
General matters
We have not been instructed to value the benefit or detriment of any contractual
arrangements or options in respect of any of the Properties.
None of the Properties were in the course of development at the date of
valuation.
VALUATION
Existing Use Value
We are of the opinion that in respect of the 201 properties the aggregate of the
Existing Use Values as at 21st November 2002 of the freehold/heritable,
leasehold and part freehold and part leasehold interests, subject to the
assumptions and comments in this Report was as follows:
£4,504,000,000
(Four Billion, Five Hundred and Four Million Pounds Sterling)
As noted above these valuations do not take account of let and sub-let rental
income for the Portfolio of circa £4 million per annum.
CONFIDENTIALITY AND DISCLOSURE
The contents of this Report are for the sole benefit of Safeway plc, including
for use in connection with any offer for Safeway plc, and for Safeway's sole
use. Consequently, and in accordance with current practice, no responsibility is
accepted to any other party in respect of the whole or any part of the contents
of this Report. Before this Report, or any part thereof, is reproduced or
referred to, in any Circular or statement, and before its contents, or any part
thereof, are disclosed orally, or otherwise, to a third party, DTZ's approval in
writing as to the form and context of such publication or disclosure must first
be obtained.
For the avoidance of doubt such approval is required whether or not DTZ Debenham
Tie Leung and/or DTZ Pieda Consulting are referred to by name and whether or not
the contents of our Report are combined with others.
It is confirmed that, subject to the above, consent has been given, and not
withdrawn, for the inclusion of this valuation report in the press announcement
by Safeway plc dated 24 January 2003.
Yours faithfully
C H SMITH MRICS
DIRECTOR
For and on behalf of
DTZ Debenham Tie Leung Limited
APPENDIX II
SOURCES AND BASES
In this Announcement:
(i) Unless otherwise stated, financial information concerning Safeway has been
extracted from the Annual Report and Accounts of Safeway for the year ended 30
March 2002, from Safeway's interim report for the 28 week period ended 12
October 2002 or from other published sources or Safeway's management accounts.
(ii) The current net book value of the 201 Safeway stores, which have been
independently valued by DTZ, of £2,561 million is derived from the Safeway
interim accounts for the 28 week period ended 12 October 2002. The valuation
surplus of £1,943 million, or 184 pence per share and the current net asset
value per share of 207 pence are based on the existing issued ordinary share
capital of Safeway of 1,056.5 million ordinary shares as at 23 January 2003,
being the last practicable date prior to the date of this announcement and a net
asset value of £2,188.7, as per Safeway's interim report for the 28 week period
ended 12 October 2002.
APPENDIX III
DEFINITIONS
The following definitions apply in the announcement and its Appendices unless
otherwise specified:
'DTZ' DTZ Debenham Tie Leung Limited
'HSBC' HSBC Bank plc
'KKR' Kohlberg Kravis Roberts & Co. LP
'Morrisons' Wm Morrison Supermarkets PLC
'Philip Green' Philip Green and his family
'Safeway' Safeway plc
'Safeway Group' Safeway and its subsidiaries and subsidiary undertakings
'Safeway Shareholders' the holders of Safeway Shares
'Safeway Shares' the existing issued or unconditionally allotted and fully paid (or
credited as fully paid) ordinary shares of 25 pence each in Safeway
'Sainsbury's' J Sainsbury PLC
'Schroder Salomon Salomon Brothers International Limited, trading as Schroder Salomon
Smith Barney. 'Schroder' is a trademark of Schroder Holdings plc and
Smith Barney' or 'SSSB' is used under licence by Salomon Brothers International Limited
'Tesco' Tesco PLC
'Wal-Mart' Wal-Mart Stores, Inc.
This information is provided by RNS
The company news service from the London Stock Exchange
