(Bloomberg) -- J Sainsbury Plc plans to buy Walmart Inc.’s Asda unit in a 7.3 billion-pound ($10 billion) deal that boosts the U.K. grocer’s clout in a highly competitive market and pushed its stock up the most in at least 30 years.
Sainsbury will pay Walmart 2.98 billion pounds in cash and 4.3 billion pounds in stock, the U.K. company said in a statement Monday detailing the terms after confirming a Bloomberg News report on the plan. Walmart would be the largest shareholder in the merged entity, with a 42 percent stake, Sainsbury said.
The combination would create a supermarket giant rivaling or surpassing current market leader Tesco Plc in market share, with 51 billion pounds in sales, 2,800 stores and 330,000 employees. The new company would gain clout with suppliers, which could help it compete against Amazon.com Inc. and fast-growing discounters Lidl and Aldi. U.K. politicians have called for a thorough antitrust review, and analysts say the deal could face regulatory hurdles.
Sainsbury Chief Financial Officer Kevin O’Byrne said consumers will benefit from lower prices as a result of the greater scale of the combined companies. The grocer said it expects to cut prices of many frequently purchased goods by about 10 percent.
“The market has changed dramatically since the last time the regulator looked at this,” the CFO said on Bloomberg television, citing the rise of discounters and online offerings.
The deal challenges Tesco just as the current market leader shows signs of overcoming a Brexit-fueled increase in costs. While Sainsbury shares rose as much as 21 percent in London, Tesco fell as much as 3.4 percent and smaller rival Wm Morrison Supermarkets Plc dropped as much as 4.4 percent in early trading.
Morrison and food-and-clothing retailer Marks & Spencer Group Plc will come under pressure to respond, with Amazon a possible suitor, Berenberg analyst Michelle Wilson said.
“If the merger goes through, Morrisons may struggle to compete,” she said in a note. “Marks & Spencer’s position as the leading clothing retailer would be overtaken,” since both Asda and Sainsbury sell apparel alongside food.
Sainsbury said it expects synergies of at least 500 million pounds from the deal and plans no store closures as a result. Sainsbury Chief Executive Officer Mike Coupe will serve as CEO.
The target for savings is “conservative” and buying synergies alone could potentially reach 1 billion pounds, Berenberg analyst Dusan Milosavljevic said by email. Sainsbury represents a less risky investment now that Walmart and the Qatar Investment Authority, the grocer’s biggest shareholder prior to the deal, will together hold more than 50 percent of the company’s shares, he said.
Walmart will get two board seats and will be “a long-term shareholder and partner,” Sainsbury said. The U.S. company said it will leverage its global reach and investment to support the U.K. grocer, which has been at a disadvantage against Tesco as the larger company uses its scale to secure favorable supply deals.
Sainsbury will benefit from the U.S. company’s technology and its buying power, particularly in non-food businesses, Walmart international President Judith McKenna said on a call with reporters.
Walmart, which bought Asda for 6.7 billion pounds in 1999, said in a separate statement that it expects to record a noncash loss of about $2 billion as a result of the transaction, reflecting the current value of shares it’s receiving and foreign-exchange rates.
The deal builds on Sainsbury’s acquisition of general-merchandise retailer Argos for 1.4 billion pounds two years ago. 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.
Asda 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.
Still, there is a significant risk that the combination will be blocked by regulators, Jefferies analyst James Grzinic said by email. The deal suggests that Sainsbury feels “very vulnerable” now that Tesco has bought wholesaler Booker Group Plc and also that Walmart “wants out of the U.K.,” he said.
While regulatory clearance of the Booker deal may have paved the way for the latest deal, a deal that reduces the number of mainstream U.K. grocers to three from four would require a change of thinking among competition authorities, Bloomberg Intelligence analyst Charles Allen said in a note. Until now they’ve not factored discounters into the equation.
Short sellers like Marshall Wace LLP and GLG Partners LP face a hit from Sainsbury’s surging share price. Such investors, who sell borrowed shares aiming to buy them back at a lower price, have long targeted U.K. grocery retailers, betting that they don’t have the scale to compete with discounters. On Monday, those bets backfired.
UBS Group AG and Morgan Stanley advised Sainsbury while Rothschild and Credit Suisse Group AG advised Walmart.
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