Asda and Sainsbury’s £15bn deal faces competition hurdle
Suppliers wary of how much muscle the new number-one retailer would flex
Britain’s competition watchdog is expected to investigate merger plans by J Sainsbury and Asda, which would see the supermarket rivals leapfrog over retail leader Tesco with more than 31 per cent share of the UK grocery market.
Details of the £15bn tie-up between one of Britain’s oldest food retailers and the Walmart-owned grocer are set to be announced on Monday.
Lawyers, politicians and retail suppliers said the UK’s Competition and Markets Authority would launch a probe into the all-share deal that would see the US’s Walmart become the merged group’s biggest shareholder.
However, the American retail giant, which will receive new shares in Sainsbury’s, will not have a controlling stake in the new company, according to people close to the talks.
Mike Coupe, Sainsbury’s chief executive and a former Asda executive, is set to run the new group, which would continue to operate Sainsbury’s and Asda as two separate brands.
Suppliers were wary of the proposed deal, and how much power the new number-one supermarket group would have. One big supplier, which did not want to be identified, said the CMA would have to get involved: “Clearly, this is concerning from a customer concentration point of view. Two of the largest customers will have 60-plus per cent of the market.”
Mike Pullen, a consultant at Carter Ruck who specialises in competition law, said: “The CMA will definitely look at this. They will look at market power and the national market, but they will also scrutinise regional clusters, and the power over suppliers.”
He added that there were likely to be divestments for the merger to be approved.
Liberal Democrat leader Sir Vince Cable said the CMA “must investigate” the deal while shadow business secretary Rebecca Long-Bailey warned the merger risked “squeezing what little competition there is in the groceries market even further”.
Mike Cherry, chairman of the Federation of Small Businesses, warned of smaller suppliers “being put over a barrel by a giant company too big to stand up to” and said the CMA should look “carefully at this proposed merger”.
There is no automatic inquiry for deals of this size but guidelines for the CMA to launch a probe include the combined company having at least £70m in turnover, or more than 25 per cent market share. The combined sales of the two retailers would be about £50bn in annual sales and more than 30 per cent market share.
The CMA has some of the most swingeing powers in the world and can order companies to divest businesses or unscramble mergers even if there is no technical breaking of competition law.
It will be one of the largest and most significant tests of the CMA since it replaced the old Office of Fair Trading and Competition Commission in 2014. Andrew Tyrie, the scourge of bankers when he headed the Treasury select committee as a Conservative MP, is its new chairman.
The deal, worth £15bn including debt, comes at a time when retailers and grocers around the world are facing immense pressure in both food and non-food.
Scale and enhanced buying power are the main attractions, according to analysts. There could also be significant cost savings. Bruno Monteyne, an analyst at Bernstein, estimated gross synergies of £600m a year, enough to raise earnings before interest, tax, depreciation and amortisation by a quarter.
In the UK, the traditional “big four” supermarkets — Tesco, Sainsbury’s, Asda and Morrisons — have seen their profit margins stripped by German discounters such as Aldi and Lidl. The pair have sharply increased their market share as Britons’ spending power has been constrained by weak wage growth. In the US, the recent acquisition of Whole Foods by Amazon has promised more disruption.
Although the deal is likely to attract significant regulatory scrutiny, Mr Coupe and Roger Burnley, his opposite number at Asda, will be emboldened by the recent CMA decision not to block the takeover of Booker, a wholesaler, by Tesco.
Walmart bought Asda, known at the time for its low prices, for £6.7bn in 1999, but the UK business has struggled recently against a resurgent Tesco and the German discounters.
“Asda has not really had a coherent response to the recent changes in the market,” said Richard Hyman, a retail consultant.
In the meantime, Walmart has become embroiled in a massive battle at home with Amazon. It is investing heavily in ecommerce and is also looking to expand in other markets such as India and China.
Sainsbury’s, traditionally a higher-end retailer with a market value of £5.9bn, expanded into household catalogue goods through its £1.4bn purchase of Argos in 2016. It is due to report full-year results next week and in January raised its forecasts for full-year profits.
The Qatar Investment Authority is the largest shareholder in Sainsbury’s, with a 22 per cent stake. The Asda-Sainsbury’s talks were first reported by Bloomberg. Rothschild is advising Asda. Morgan Stanley and UBS are working with Sainsbury’s.