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Sainsbury and Asda announce plans to merge

Laith Khalaf

Sainsbury has confirmed plans to merge with Asda in a deal which will see Asda’s current owner, Walmart, taking a stake of 42 percent in the enlarged group. Sainsbury will in addition pay £2.975 billion to Walmart for control of Asda. Walmart is to retain responsibility for the Asda pension scheme, subject to approval. Article Laith Khalaf, Senior Analyst, Hargreaves Lansdown.

The deal is expected to complete in the second half of 2019. Sainsbury shares rose 20 percent in early morning trading. Tesco shares were down 4 percent, Morrison shares were down two percent. Sainsbury and Asda have clearly decided there’s strength in numbers as they battle the headwinds currently buffeting the UK retail sector.

Price competition from the discounters Aldi and Lidl, combined with changing shopping habits and the margin squeeze from weaker sterling have all contributed to a period of reinvention for the UK supermarkets. Indeed it was only two years ago Sainsbury took over Home Retail Group to boost its prospects, by integrating Argos within its store estate.

There are clear benefits from the two supermarkets joining forces, particularly when it comes to leveraging their combined buying power, which should result in both lower prices for customers and higher margins for the business. Sainsbury expects better buying terms to generate £350 million of efficiencies, while also lowering shop prices by 10 percent on some popular items.

The stance of the Competition and Markets Authority will be critical to the viability of this deal. The recent approval of Tesco’s takeover of Booker group may give some cause for confidence, though that deal was a vertical rather than a horizontal integration, with neither company competing directly in their key markets.

That’s not the case for Sainsbury’s and Asda, though the fact that they have complementary regional footprints will mitigate in their favour. The competition authorities will also note that the combined supermarket will still only have around the market share of the industry leader, Tesco, in a sector where dominance has been brutally eroded by Aldi and Lidl. If Sainsbury’s can demonstrate the merger will create lower prices for customers, that will help too.

We expect the competition authority to take a localised approach to their assessment, as they did with the Tesco takeover of Booker, so store disposals could still be a feature of the merger. Although Sainsbury thinks they will be able to avoid any closures.

If the deal goes through, the prospect of Sainsbury, Asda, and Argos working together, with Walmart chipping in too, is a pretty powerful combination. It would also be good for consumers, who can expect lower prices as a result. Meanwhile the executives of other supermarkets no doubt have their head in their hands at the prospect of another price war.

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