(Bloomberg) -- J Sainsbury Plc Chief Executive Officer Mike Coupe is fighting back against Amazon.com Inc. and discount grocers with another big deal -- a multibillion-pound transaction with Walmart Inc. that would fundamentally transform Britain’s supermarket business.
The company plans to unveil details of a combination with Walmart’s Asda chain on Monday, after confirming a Bloomberg News report Saturday that the companies were in discussions. Walmart would be the largest shareholder in the combined entity, with a stake of more than 40 percent, according to people familiar with the situation. Representatives for Walmart and Sainsbury declined to comment.
For Coupe, who took over four years ago as CEO, the step would be the boldest -- and riskiest -- yet to transform the U.K. retail scene amid incursions from German discounters Lidl and Aldi and the rise of e-commerce. The deal would build on Sainsbury’s 2016 acquisition of general-merchandise retailer Argos, which has begun to bolster the grocer’s profits as fierce price competition and the Brexit-induced weakness of the pound squeeze margins in the food business.
Combining Sainsbury, with a market value of 5.9 billion pounds ($8.1 billion), with Asda would create a giant to rival or even surpass Tesco Plc in market share, with about 2,800 stores, nearly 350,000 employees and sales of 50 billion pounds. Currently, Sainsbury ranks second among U.K. supermarket chains, followed by Asda.
"There’s undoubtedly some scale benefits in buying," said Bryan Roberts, an analyst at TCC Global. Still, a combined entity “doesn’t get rid of the problems both companies face," Roberts said. "They still won’t be cheaper than Lidl or Aldi."
Coupe, who previously worked at Asda and other U.K. retailers, has been pushing to reshape the London-based company as it wrestles with the online threat that has contributed to the demise of department-store chain BHS, electronics retailer Maplin and the U.K. arm of Toys "R" Us.
Supermarket operators haven’t been spared, either, cutting thousands of jobs in response to a pricing squeeze exacerbated by the Brexit-induced weakness of the pound. Reported profits of Tesco and Marks & Spencer Group Plc have more than halved in the past three years. Compounding their woes is a switch by consumers to online shopping that’s ahead of many other countries. About 18 percent of retail sales take place online in Britain, compared with about 12 percent in the U.S.
While Coupe has defied some analysts’ expectations by successfully integrating Argos and wringing out cost savings, weaving together Asda with Sainsbury could present bigger challenges. The Walmart division is favored by shoppers on tight budgets, while Sainsbury appeals to a more affluent crowd. Sainsbury has expanded aggressively into convenience stores and is focused on the south of England around London, while Asda has more large supermarkets spread across the country’s north. That geographical distribution limits store overlap.
Synergies could be minimal in areas like marketing if Sainsbury and Asda maintain separate brand identities, said Roberts, adding that he doesn’t expect the proposal to face major competition hurdles, but that divestitures of individual stores might be needed in areas where the two grocers overlap.
Sainsbury’s current biggest shareholder, the Qatar Investment Authority, backs a potential merger, according to a person familiar with the deal. The gas-rich country’s $320 billion sovereign wealth fund, which holds a 22 percent stake, is aware of the discussions and plans to publicly declare its support Monday, said the person.
Some British politicians have taken a more critical view, with John McDonnell, Treasury spokesman for the opposition Labour Party, telling Sky News that the deal should be examined "in some detail" by antitrust regulators to ensure consumers are not harmed.
Sainsbury may have been encouraged by the regulatory response to Tesco’s recent purchase of wholesaler Booker Group Plc, which U.K. authorities cleared after concluding it posed no major threat to competition.
For Walmart, which bought Asda for 6.7 billion pounds in 1999, the possible deal marks a further retrenchment of its international footprint as the company focuses on competing with Amazon at home. Walmart acquired Asda at a time when the U.S. company was expanding aggressively overseas. Since then it has backed out of international markets ranging from Germany to South Korea.
The significant stake that Walmart is expected to retain in the combined retailer could give it greater clout with suppliers. While Tesco and other grocers have shown signs of recovering lost pricing power in recent months, Asda has suffered from the incursion of Lidl and Aldi. Long known as Britain’s lowest-priced mainstream grocer, the Walmart unit has lost a major selling point to the duo of discounters.
With a combined market share of nearly 32 percent, according to Kantar Worldpanel, a fused Asda and Sainsbury could surpass Tesco, with about 28 percent. Sainsbury has about 28 billion pounds in annual revenue, compared with Asda’s 22 billion pounds.
Morgan Stanley and UBS Group AG are advising Sainsbury and Rothschild is advising Walmart, according to people familiar with the matter. Representatives for UBS and Morgan Stanley declined to comment while a spokesman for Rothschild didn’t immediately comment.
©2018 Bloomberg L.P.