Watchdog blow to Sainsbury’s deal ‘leaves private equity eyeing Asda’

Another option would be to merge Asda with another retailer
PA Wire/PA Images
Laura Onita20 February 2019

Asda on Wednesday became a prime target for a private equity bid after its £12 billion merger with larger rival Sainsbury’s was dealt a huge blow.

The competition watchdog demanded that one of the two brands or “significant” numbers of stores be sold, if the mega-deal were to have a chance of getting through by the April 30 deadline.

The Competition and Markets Authority said the deal would mean higher prices and less choice for shoppers.

But this could see other possible suitors for the UK’s third-largest grocer swoop in as its parent company Walmart is keen to offload it.

Analysts at Jefferies said: “The business will represent an attractive target for private equity. If we are correct, an alternative offer with no obvious regulatory concerns is likely to emerge quickly.”

Bernstein analyst Bruno Monteyne believes such a move could be a boon for the grocery market in Britain as it would make Leeds-based Asda more competitive than if the Sainsbury’s deal succeeded. The watchdog would be more likely to approve it too.

Monteyne said: “An independently run, separate brand that can compete and keep prices down could come in.”

Shore Capital analyst Clive Black said: “For Walmart this is a headache that requires a plan B, although we sense that there will be more smiles in Leeds than Holborn [Sainsbury’s HQ].”

“There may be another player. I wouldn’t be surprised if Amazon behind the scenes would be looking at this,” said a former boss of a Big Four supermarket.

Under the Sainsbury’s and Asda deal, Walmart is expected to get almost £3 billion in cash and keep a 42% stake in the combined business.

Walmart, which bought Asda in 1999, could agree to similar terms under a different buyer, which would allow the new owner to still take advantage of its buying power, or Walmart could exit the business altogether.

Another option would be to merge Asda with another retailer, such as discounter B&M, which also caters to shoppers hunting for bargains, making it a better fit than Sainsbury’s. Although Asda has seen an improvement in trading over the past year, it reported a slowdown in sales on Tuesday for the three months to the end of December. Operating profits were also down.

Sainsbury’s chief executive Mike Coupe said the CMA’s verdict was “fundamentally flawed” and vowed to make “very strong representations” to it about its “inaccuracy and lack of objectivity”.

“They have fundamentally moved the goalposts, changed the shape of the ball and chosen a different playing field,” he told the BBC. “This is totally outrageous.”

Shares fell 16% or 47p to 241p.

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