UK supermarkets Sainsbury’s, Asda agree £13bn merger

Sainsbury's is currently Britain's second largest supermarket chain

London (AFP) – Britain’s second and third biggest supermarket chains Sainsbury’s and Walmart-owned Asda have agreed to merge, the pair said Monday, hoping to create a £13-billion ($18-billion, 15-billion-euro) retail king and leapfrog UK number one Tesco.

The blockbuster deal — which is effectively a takeover bid with Sainsbury’s acquiring a majority 58-percent stake — comes as the British supermarket sector faces squeezed profit margins and fierce competition from German-owned discounters Aldi and Lidl and online US titan Amazon.

Britain’s Competition and Markets Authority (CMA) regulator warned that the deal will ‘likely’ be subject to a review, amid concerns over the impact on consumer choice and jobs — despite terms of the deal saying both brands would be retained and no stores shut. 

News of the tie-up sent Sainsbury’s share price spiking more than 20 percent in initial deals on the London stock market. Stock in Tesco sank almost four percent on fears the group could lose its supermarket crown and possibly also the title of Britain’s biggest retailer.

“Sainsbury’s and Walmart Inc. are pleased to announce that they have agreed terms in relation to a proposed combination of Sainsbury’s and Asda Group Limited, a wholly owned subsidiary of Walmart, to create an enlarged business,” they said in a statement after confirming advanced talks over the weekend.

The transaction values Asda at £7.3 billion. Sainsbury’s market capitalisation stood at £5.9 billion at the close of business on Friday.

“This is a transformational opportunity to create a new force in UK retail, which will be more competitive and give customers more of what they want now and in the future,” said Sainsbury’s chief executive Mike Coupe.

Walmart will own 42 percent of the combined business and receive £2.97 billion in cash, and 29.9 percent of total voting rights.

 – ‘Rapid change’ – 

“The retail sector is going through significant and rapid change, as customer shopping habits continue to evolve,” Sainsbury’s added.

“This has led to increased competition across grocery, general merchandise and clothing, as customers seek ever greater value, choice and convenience.”

The combined business would have total revenues of £51 billion and boast a network of 2,800 Sainsbury’s, Asda and Argos stores.

“We believe the combination offers a unique and exciting opportunity that benefits customers and colleagues,” said Walmart chief executive Doug McMillon.

“We look forward to working closely with Sainsbury’s to deliver the benefits of the combination.”

Sainsbury’s will seek to lower prices by around 10 percent on many popular products, and anticipates cost savings of at least £500 million. 

The new company will have a combined 24 percent of the British grocery market, beating Tesco on 22 percent, according to data published by retail consultancy Euromonitor.

“The deal points to the highly competitive UK grocery market, which has long been concentrated in the hands of the top four players — Tesco, Sainsbury, Asda, Morrisons — but is now facing an onslaught from new challengers,” said Simran Jagdev, analyst at the Economist Intelligence Unit.

“The transaction will, however, attract regulatory scrutiny, given that the merged companies will become the largest grocery retailer in the UK.”

In later morning deals on the London stock market, Sainsbury’s stock rallied 16.0 percent to 313 pence. 

Tesco pared losses to 236.50 pence, down nearly 0.7 percent from Friday’s closing level.

 – ‘Better position to fight’ – 

In Britain’s fast-changing retail landscape, Sainsbury’s previously bought catalogue retailer Argos in 2016 for £1.4 billion.

This year meanwhile, Tesco purchased wholesaler Booker — Britain’s biggest cash-and-carry operator — for £3.7 billion in a deal that was completed in March.

At the same time, Amazon has ramped up its ‘Fresh’ delivery service in Britain, amid speculation that it could decide to buy a UK supermarket group.

“What is clear from the proposed deal is that Sainsbury’s and Asda are very aware of a potential Amazon acquisition in the UK supermarket industry which is why they are looking for scale in order to safeguard their future,” said Euromonitor analyst Philip Benton.

“They (are) also concerned at being able to maintain price competitiveness, with discounters Aldi and Lidl continuing to eat at their market share.

“It would certainly be the biggest merger in UK retail history and be of grave concern to their number one rival Tesco.”