Sainsbury Should Now Walk Away From Asda Deal
(Bloomberg Opinion) -- Sasda is looking more like Sad-sda after U.K. regulators said on Wednesday they could block the proposed combination of J Sainsbury Plc and Walmart Inc.’s British subsidiary, Asda.
The Competition and Markets Authority’s findings are more onerous than even the worse case scenarios that the two companies or financial analysts had mapped out.
But they do have a silver lining for Sainsbury Chief Executive Officer Mike Coupe. They make it easier for him to walk away from a deal that is looking much more of a headache than he anticipated when he triumphantly announced the 7 billion pound ($9.1 billion) purchase back in April.
To recap: Sainsbury and Asda say they need to join forces to cope with the changing retail environment – read the increasing might of Aldi and Lidl, the German no-frills supermarkets who continue to gobble up all the sales growth in the sector.
The CMA recognized that Aldi and Lidl do compete, but not to the extent of the remainder of the big four supermarkets, Tesco Plc and Wm Morrison Supermarkets Plc.
Officials also applied a much more stringent test of the incentive of the two companies to raise prices than in other recent cases, indicating that were the transaction to proceed, shoppers would likely encounter higher costs.
All in all, competition could be affected in 629 local areas, even more than the 463 that the CMA outlined in the first phase of the competition.
To address its concerns, it could block the deal, force the combined group to sell off one of its brands, or require a significant number of store disposals.
Coupe attacked the findings as “outrageous.”
His view certainly has merits. Aldi and Lidl are continuing to gain share. What’s more, with the two privately owned companies snapping at the heels of the big supermarkets, it is difficult to see how any grocer could raise prices significantly.
The CMA's findings are in stark contrast to its ruling, in late 2017, on Tesco's purchase of Booker. It waived this 4 billion pound transaction through without demanding any concessions. That looked unduly lenient. This time around, its conclusions look unnecessarily harsh.
Though that doesn’t make things any better for Coupe, he has actually avoided two outcomes that would have been worse.
The first would have been having to manage a requirement for store disposals that is high, but not quite so brutal. This would have stretched the economics of the deal, but not been terminal. The choice of whether to continue would be much more finely balanced.
The second would have been a requirement for Sainsbury to make disposals, but then be unable able to find buyers for those stores. That would have made the grocer simply look incompetent.
Sainsbury’s performance has weakened since the merger was announced, and what Coupe really needs to do is improve the underlying business. Focusing on this, rather than battling with the CMA or trying to renegotiate the terms with Walmart, looks the best course for the grocer.
As the public face of the transaction, the regulator’s damning indictment raises questions about Coupe’s position.
Sainsbury clearly has the most to lose. As I have argued, Walmart has other options than this deal. It could persuade a private equity buyer to consider a purchase of Asda. That’s not the case for Sainsbury. The prospects for a buyout are less clear-cut, although it may be a tempting opportunity for Amazon.com Inc.
At least the regulator’s response allows Coupe to paint the CMA as the villain of the piece. He has ample reason to walk away, and that’s what he should do. He can now legitimately say that he tried to do something that he thought was in the interests of the companies and consumers, and was prevented from doing so.
The CMA has given him a way out. He should use it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
©2019 Bloomberg L.P.