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 per cent 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 per cent 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 per cent of the combined business and receive £2.97 billion in cash, and 29.9 per cent of total voting rights.
“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 per cent 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 challenges,” said an 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.
