(Bloomberg) -- Sainsbury seems to have beaten the mighty Walmart in Britain’s megashop deal.
Mike Coupe, CEO of J Sainsbury Plc, may be on his way to pulling off a coup with his 7.3 billion pound ($10 billion) plan to buy Walmart Inc.'s Asda.
He’s acquiring an asset for no premium: Applying Sainsbury's enterprise value to Ebitda multiple to Asda values it at just over 7 billion pounds. That is also roughly the value of Asda's freehold property. And the deal will get done without the buyer having to take on the target’s final salary pension scheme.
Sainsbury will pay in a combination of ordinary shares, non-voting shares and cash, leaving Walmart with a 42 percent economic stake and less than 30 percent of the votes, a structure designed to prevent the seller having to make a bid for Sainsbury under U.K. takeover rules.
The synergies of 500 million pounds annually are plausible, at roughly 1 percent of combined sales. On Sainsbury's EV/forward Ebitda multiple, these could be worth 2.8 billion pounds. The U.K. group's current investors will share in 58 percent of the value creation under the deal terms, worth 1.6 billion pounds.
The 15 percent gain in Sainsbury's shares on Monday roughly priced in that upside less the 750 million pounds of announced deal-related costs and capex.
Walmart, meanwhile, gets 3 billion pounds in cash -- useful as it invests in ecommerce to battle Amazon.com Inc. in its home market. This is probably the only deal it could do to exit Asda. A private equity buyer is hard to see in the current climate.
Most important, it reduces Walmart's exposure to the U.K. market, where it has struggled for the last few years.
But the risk with Coupe's bold assertions is that he underdelivers. Chief among the pitfalls is scrutiny from the competition authorities. The new group will pull ahead of Tesco Plc to become Britain’s biggest grocer by market share.
Sainsbury does have some arguments on its side here: the regulator waved through Tesco’s purchase of Booker with no remedies, and Aldi and Lidl now have almost 13 percent of the market between them. They are not going away, so that creates new competitive force.
Still, the belief that the CMA will require only limited store disposals could prove naive. As analysts at Bernstein point out, if trustbusters do force significant store closures, that can unravel the economic benefits of the combination.
The pledge to cut the price of everyday essentials by 10 percent also looks ambitious. True, the group will have access to Walmart's buying scale, but Asda has had that for years. Yet it has floundered.
Investors are shrugging off the potential pitfalls right now. But let's not forget the initial rapturous response greeting Tesco's bid for Booker. Shareholders soon began to worry that the U.K. supermarket would be overstretched, and the jubilation following the announcement quickly faded.
And rivals are unlikely to take the new competitor lying down. Although Tesco's options are limited, Morrison could look to combine with a rival, perhaps the Co-op or Iceland.
Coupe looks to have outmaneuvered them right now. But whether the deal looks so good after it has been through the regulator's wringer, or when the Sainsbury management team is running two contrasting brands, will determine whether it really is the biggest bargain on the supermarket shelf.
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