How Sainsbury’s Project Solar Crashed Down to Earth

(Bloomberg) -- Standing on a stage in the plush London offices of the investment bank of UBS Group AG last April, Mike Coupe, chief executive officer of J Sainsbury Plc, was almost evangelical when explaining why the U.K. supermarket had to merge with Walmart Inc.’s Asda.

The soft-spoken head of Britain’s second-largest grocer went as far as to liken the proposed tie-up with Asda to “planets aligning" in a preordained process that had been years in the making. In the months before the deal was announced, the grocers even dubbed the secret merger discussions “Project Solar,” with Sainsbury taking the code-name “Jupiter” and Asda referred to as “Mars.”

The merger would have reshaped Britain’s supermarket landscape, catapulting the combined Sainsbury and Asda past Tesco Plc as Britain’s largest grocer, with a market share of more than 30 percent. But it would also have put almost three-fifths of Britain’s supermarket industry under the control of two companies—too great a concentration for the U.K. antitrust regulator. Earlier this week, it blocked the 7.3 billion-pound ($9.4 billion) transaction, asserting it would be damaging for British consumers. In retrospect, it appears that the predestined outcome for Coupe’s planetary combination was failure.

Sainsbury’s and Asda’s proposal “flew in the face of competition policy,” said David McCarthy, an analyst at HSBC. 

Sainsbury argued it needed greater scale to compete with the likes of Amazon.com Inc., which is expanding its grocery business as the U.K. becomes a global leader in online shopping, and German discounters Lidl and Aldi. With Walmart keeping a stake in the combined company, Sainsbury could have benefited from the U.S. giant’s global heft in purchasing—helping it close a pricing gap with Tesco.

Aggrieved senior executives at Asda and Sainsbury now say their grand plan never stood a chance because the Competition and Markets Authority was hostile to the deal from the start. But questions persist about how the regulatory process was managed by the grocers, and in particular by Coupe, the architect of the merger, whose first blunder occurred on the day it was announced when he was caught on camera singing “We’re in the money.”

The grocers should have taken a different approach given the scale of what they were asking the regulator to approve, said two people familiar with the matter. Last summer, before the CMA had even begun its in-depth probe, there were discussions between Sainsbury, Asda and their advisers about when the supermarkets should make public the concessions they were planning to offer—particularly on their strategy for fuel prices, the people said, asking not to be identified because the discussions were confidential.

Asda favored making legally-binding commitments very early on. But no firm undertakings were made until February, 10 months after the deal was announced, and only after adverse initial findings were published by the CMA.

In the rearguard action to save the deal, Coupe said he believed the CMA’s provisional report was “outrageous,” before promising to deliver 1 billion pounds of lower prices for customers—to be independently verified by a third party—and to cap the gross margin on its fuel sales for five years. Sainsbury also offered to dispose of up to 150 stores. But it was too little too late.

By then, the CMA, determined to ensure that the loss of one of Britain’s Big Four supermarkets wouldn’t hurt competition, was in the final stages of its review. Unconvinced that the concessions would fix anything, it said shoppers would be worse off from the combination, facing higher prices and less choice.

A person close to Sainsbury, who declined to be identified because the matter was confidential, said there were numerous advisers and varying opinions on the deal and decisions on strategy were mutually agreed upon with Asda. 

Representatives of Asda, Sainsbury and the CMA declined to comment.

Another sign the negotiations were going off the rails came at a highly unusual court hearing in December, where Sainsbury challenged the regulator’s tight deadlines. In their submission to the judge, the CMA’s lawyers complained that Coupe went behind their back to the business department, which oversees the regulator. Coupe spoke with Alex Chisholm, one of the most senior government officials in the department, who formerly led the CMA himself.

Sainsbury’s successful court challenge brought the legal teams some time, but nothing more at a regulator that was facing sustained political pressure to protect consumers. Indeed, the new chairman, Andrew Tyrie, a former lawmaker with a reputation for holding bankers to account, had previously railed against dominant companies.

In the end, the court date was the high point for the Sainsbury side. Less than four months later the regulator delivered its hammer blow, leaving the deal for dead.

Now, after touting the combination as a key to Sainsbury’s long-term future, Coupe will have to persuade investors that he has a viable plan B, and that he’s the right person to carry it through. He won’t have much breathing room: the company presents fiscal full-year earnings on Wednesday following a run of lackluster sales.  For Asda, a different deal may be on the cards. Walmart is exploring options for the unit, including an initial public offering, people familiar with the matter said Thursday.

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net, Frank ConnellyTony Aarons

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