Sainsbury Must Show Shopping Revolution to Get Asda Cleared

(Bloomberg) -- J Sainsbury Plc needs to convince the U.K.’s merger watchdog that online retailers and cut-throat discounters have revolutionized how the British buy groceries in order to win approval for its 7.3 billion pound ($10 billion) bid for Asda.

The merger -- creating a chain that would rival leader Tesco Plc in market share -- may only go ahead in its current shape should the Competition and Markets Authority decide that new competitors, including discount specialist Aldi Stores Ltd. and internet giant Inc., have modified the industry, analysts and lawyers said.

During Wm Morrison Supermarkets Plc’s successful bid for Safeway 15 years ago, big retailers were restrained because regulators assumed that people were only willing to travel a short distance to do one big weekly shop. While shopping habits may have evolved, politicians and consumer advocates are calling on the CMA to scrutinize the deal that would give Sainsbury 51 billion pounds in sales, 2,800 stores and 330,000 employees.

Sainsbury and Asda “have to show that the competition has fundamentally changed since then, such that you have a much wider competitive set because you have to include online e-grocers, you have to include new entrants like Amazon coming in to that space and you obviously have to include all the discounters and the convenience stores," Stephen Smith, a partner at Bristows LLP, said.

Sainsbury Must Show Shopping Revolution to Get Asda Cleared

Grocery stores have faced intense examination from British antitrust regulators for the past 20 years as officials probed allegations of price collusion and bullying of suppliers. But the CMA and its predecessors haven’t looked at a supermarket chain buying a direct rival since Morrison’s purchase in 2003. Regulators produced a report that said they would have opposed Asda, Sainsbury or Tesco buying Safeway because of danger of eliminating competition.

That review focused on how stores competed locally and ordered Morrison to sell off grocery stores in 48 areas.

“The U.K. market has changed dramatically in the last 10 years with so much choice for customers and so many new entrants coming in: the discounters, online players,” Sainsbury Chief Financial Officer Kevin O’Byrne told Bloomberg News. “The benefit for the U.K. consumer is that cost of products on the shelf will go down" as a result of the merger.

‘Significant Risk’

Sainsbury Chief Executive Officer Mike Coupe said the company would ask the CMA to go directly to an indepth review of the transaction, and that some stores might have to be sold to win approval. He suggested that it would take as long as 18 months to review the merger.

Jefferies analyst James Grzinic said there’s a “significant risk” of the purchase being blocked but that Sainsbury would be willing to make concessions.

A Sainsbury’s takeover of Asda “would represent a remarkable step-up in U.K. industry consolidation, if cleared,” said Grzinic, who has a “hold” rating on Sainsbury.

One key question will be how far Lidl Ltd. and Aldi, which only carry a limited range of products, really compete with bigger players with a far wider range, Bristows’s Smith said.

Discounters “are running stores that are probably a third of the size of the larger supermarkets,” he said. “It would be essential to show that they are in the market."

Approval hangs on whether the CMA sees discounters as true rivals to Sainsbury and Asda, Bernstein analyst Bruno Monteyne said in a note published ahead of the companies’ Monday statement on the deal.

‘Bold Gamble’

The transaction is “a bold gamble” that could unravel if the CMA takes a hard line on store disposals, he said. Selling off more than 13 percent of the stores might stop the deal adding to growth, he said.

The CMA took the rare step of issuing a statement saying it would likely handle the merger review. Its procedure starts with talks to ensure companies are supplying information the agency needs.

The CMA “will use all of their resources to ensure they fully understand not just the bricks and mortar marketplace but also the competition from online retailers," U.K. Business Minister Andrew Griffiths said in parliament Monday.

“The retail sector is in a huge state of flux, we must all understand that the way consumers purchase these days is changing dramatically," Griffiths said. "This by its very necessity means the retail sector has to change and has to adapt."

Rebecca Long-Bailey, the opposition Labour Party’s business spokeswoman, countered that the “deal poses significant competition risks.”

“There are risks to jobs by potential reorganization and store closures and risks to the wider grocery industry as a Tesco/Sainsbury’s-Asda duopoly emerges with unrivaled power to dominate, dictating choice and prices for consumers which in time may prove detrimental,” she said. “This unrivaled power also poses immense risk to suppliers.”

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