KOHLBERG Kravis Roberts, the US buyout giant, is preparing to enter the bidding contest for Safeway, the struggling supermarket chain. An offer could emerge this week.

The giant buyout firm is understood to be in discussions with Asda’s US parent, Wal-Mart, with a view to making a joint bid for Safeway. Wal-Mart is sizing up the KKR approach but is also considering a stand-alone cash bid well in excess of 300p.

A joint bid with Wal-Mart, which would almost certainly result in KKR keeping a large proportion of Safeway stores, may increase the US supermarket chain’s chances of obtaining regulatory approval.

The news came as J Sainsbury revealed that it is set to make a cash-and-shares bid of at least 300p for Safeway, valuing it at about £3.2 billion. The price compares with last week’s £2.6 billion all-paper offer from Wm Morrison.

Safeway shares leapt 24p to 303p, while Sainsbury’s fell 15p to 241p and Morrisons slipped back 5p to 185p.

Sainsbury’s chief executive, Sir Peter Davis, admitted that his deal should be regarded as an opening gambit.

He said: “This is not necessarily the end-game but we do want to be at the party.”

Sainsbury’s is thought to be able to raise its bid to 400p a share or more without diluting combined earnings or putting its balance sheet under undue pressure. That said, Standard & Poor’s, the rating agency, yesterday threatened to downgrade Sainsbury’s credit rating on the back of its proposed offer for Safeway.

Scottish Widows, which owns 6 per cent of Safeway, said: “We would expect a bid considerably in excess of 300p. At this level, there is not much bid premium compared to Safeway’s peer group.”

Sainsbury’s is also considering a variety of deals with rivals such as Morrisons and Wal-Mart in an effort to placate the competition authorities. It could also link up with KKR.

Sainsbury’s has already identified 90 stores in the Safeway estate which it believes it would have to sell to receive regulatory clearance. The disposal could generate up to £1 billion, significantly reducing Sainsbury’s bid costs.

Sainsbury’s intends this week to file an application to the Office of Fair Trading, explaining that a deal with Safeway would create a strong second player in the industry, to vie effectively with Tesco, the market leader. Sainsbury’s also believes it has a far more compelling competitive case than Wal-Mart.

Sir Peter, who has been asked by the Sainsbury’s board to stay on beyond the end of his contract in March 2004, said: “We believe Safeway shareholders would prefer the cash element we offer to Morrisons’ all-share bid and they would also prefer our more progressive dividend policy.”

Safeway noted Sainsbury’s offer. Sainsbury’s original proposal of last year was thought to be unpalatable as it was asking Safeway to include a large poison pill to prevent other suitors from courting the group. Yesterday Sainsbury’s said it had identified cost savings of at least £300 million from a tie-up with Safeway, adding that revenues could be enhanced by about £650 million, most of which would be returned to customers through lower prices.

The deal would incur one-off costs of £300 million and capital expenditure of £500 million. There would be about 1,700 job losses.