Safeway is expected to inform Morrisons it will need to offer £3.5 billion of shares and cash to win a recommendation for its takeover offer according to a report in the Sunday Times.

Sources close to Safeway will need to offer 277.5p a share and 50p a share in cash representing a cash sweetener of £500 million.

The risky move is seen as an attempt by Safeway directors to extract the best possible price from the Bradford-based group. However, the Safeway board recognises that Morrisons is in a strong position and could choose to offer a price below its original £2.95bn all-share offer.

Safeway's share price fell 20 pence at the end of last week, closing at 276.25p, as investors grew nervous that Morrisons would be submitting a reduced bid.

Safeway insiders also said that Morrisons need the co-operation of its management if implementation of the takeover is to proceed smoothly.

Tony Watson of Scottish Widows, a large Safeway shareholder, said: “The original price Morrisons offered is a starting point, but it is up to the Safeway board to get the best possible price for shareholders. It would very disappointing if the deal did not go through at all.”

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