Sainsbury-Asda: Five Things to Look for in Regulator's Report
(Bloomberg) -- As the deadlines from the U.K. Competition and Markets Authority started stacking up, J Sainsbury Plc Chief Executive Officer Mike Coupe went to complain about the regulator.
Coupe spoke with Alex Chisholm, one of the most senior government officials in the business department who formerly led the CMA himself. Coming in the middle of an in-depth investigation into Sainsbury’s 7.3 billion-pound ($9.4 billion) takeover of Walmart Inc.’s Asda, the intervention struck CMA officials as an attempt to go behind their back.
The back-and-forth in the biggest U.K. merger review in recent years culminated in a rare court clash in December, where a judge ruled that the CMA had imposed excessively burdensome demands on the supermarket chains.
The dispute highlighted the tension between the grocers and a regulator determined to ensure that the loss of one of the Big Four supermarkets doesn’t lead to less competition and, ultimately, higher prices. The CMA formally pushed back its final deadline this week and is now set to issue its preliminary findings on the merger as early as Tuesday alongside the all-important remedies it thinks will be needed.
Here are the key things to watch:
How Many Stores?
The total number of stores that may need to be sold off is the headline-grabbing figure. In September the regulator said it saw a “real prospect” of reduction in competition from the deal and identified more than 460 problematic areas.
Analysts surveyed by Bloomberg have forecast that the combined entity will need to dispose of as many as 144 stores. The mean estimate was for 78. Anything over 150 stores and the disposals will eat into the cost savings from the merger, Berenberg analysts said.
Still, some stores are more valuable to the combined entity than others and Sainsbury will look to hold on to the profitable ones.
While the CMA is mapping out the potential overlap of stores in each local area, it has said it will also look at the acquisition at a national level, which has a potentially more damaging impact.
The suppliers are key to this analysis. If the CMA finds the combined group’s increased buying power would squeeze suppliers, there’ll be a focus on what potential remedies would be required.
Key to the analysis of local areas and what that might mean for store disposals is what the CMA will say about the discount specialists Aldi Stores Ltd. and Lidl Ltd. Both saw gains in market share through the end of January, albeit at a slower rate, according to Kantar Worldpanel.
The regulator excluded the two in its preliminary count of stores affected and Sainsbury’s traditional rivals have downplayed their importance, saying that the discounters aren’t a new development in the U.K. grocery market.
The big competitors Wm Morrison Supermarkets Plc and Tesco Plc both said they set most prices on a national basis. But it’s different with gasoline, which varies by region. Tesco has said the merged group may have a “reduced incentive to maintain Asda’s low prices.”
Who Will Benefit?
Sainsbury’s and Asda’s eagerness to close their mega-deal may mean there are discounts on offer to a company willing to buy any stores, Berenberg said. Morrison could potentially buy more than 100 stores, Citi analysts have said.
The CMA could block the deal if Morrison, or any other bidder, refuses to purchase the stores.
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