Sainsbury’s bags Asda in £7.3bn deal

published 4 May 2018

894_MW_P06_Shares_Main — "Sasda": a good geographic and strategic fit

The two supermarkets would pose a powerful joint challenge to Tesco. But the deal raises serious competition concerns. Alex Rankine reports.

Talk about a "supermarket sweep", says Carol Ryan on Breakingviews. J Sainsbury plans to buy Asda for £7.3bn in cash and stock. Asda-owner Walmart will take a 42% stake in the new entity. The merged group would command a 29% share of the UK grocery market, while maintaining Sainsbury's and Asda as two separate brands. With this deal, Sainsbury's may do what Walmart has "failed to achieve" ever since it entered the UK market in 1999: challenge the dominance of market leader Tesco, which has a 27.6% market share.

Sainsbury's reckons it stands to make a "double-digit return" on the tie-up, with a promised £500m in synergies. Yet supermarket mergers don't always go to plan. Remember how the combined Morrisons-Safeway group lost over a quarter of its market share following the merger in 2004. There is certainly a risk that "Sasda" could turn into "Sadbury", say Andrea Felsted and Chris Hughes on Bloomberg Gadfly. Asda has performed poorly in recent years and is weighed down by big stores "just the sort that many consumers don't want to shop at any more". On the plus side, however, Sainsbury is focused onthe south of England while Asda's stronghold is the north.

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Will regulators agree to the deal?

The two brands complement each other strategically, too. Asda's extensive non-food and clothing business could gel with Sainsbury's Argos home-goods division, giving birth to a behemoth "able to rival John Lewis and Amazon". Yet it remains to be seen whether the tie-up still looks like "the biggest bargain on the supermarket shelf" once it has been through the "regulator's wringer".

The pair will argue that the rise of online supermarkets such as Ocado and the threat of entry by Amazon will ensure ongoing competition, says Jonathan Ford in the Financial Times. The two chains will also point to the Competition and Markets Authority's (CMA) "recent, and mystifying decision" to wave through Tesco's takeover of wholesaler Booker. They want to return to a time before the "food retailing oligopoly" of Tesco, Sainsbury's, Asda and Morrisons was broken by the "spectacular advances" of German discounters Aldi and Lidl. But "swapping a Big Four for a Big Two", with Tesco and Sainsbury's/Asda controlling a similar share of the market, is no solution and the "outlook for suppliers would be bleak".

It is hard to imagine the Competition and Markets Authority "swallowing" the excuses of the budding monopolists, says Nils Pratley in The Observer. True, new competitors have "roughly halved" the profit margins of the big operators, "but that's not the CMA's problem". Asda is free to "compete its way out of its current trading difficulties" backed by all the firepower of US parent Walmart rather than "seeking sanctuary" with Sainsbury's. "This deal looks a very long way from being done."

Sprint/T-Mobile in mobile mega-merger

It has taken "years of flirtation and false starts", but US mobile carriers T-Mobile and Sprint have "finally inked a deal", says Tara Lachapelle for Bloomberg Gadfly. America's third-largest mobile carrier agreed over the weekend to buy Sprint, the number four in the sector, for $26bn in a mega-merger that would create a combined outfit with 130 million customers.

The firms are predicting $6bn in annual cost savings, but there are plenty of uncertainties about whether regulators, who traditionally prefer to maintain a minimum of four major carriers in the market, will intervene. If the union collapses this time, Deutsche Telekom-owned T-Mobile can at least feel secure in the knowledge that its "growth prospects remain better than peers", but struggling Sprint "doesn't have much of a fallback plan".

Both carriers are "laser-focused on winning over regulators", says Andrew Ross Sorkin in The New York Times. They are pledging to invest in a "robust 5G wireless network" and create jobs in rural areas. The pair argues that, with cable industry entrants such as Comcast shaking up wireless , talk of four major carriers is out of date.

Note too, says Jennifer Saba on Breakingviews, that talk of "leapfrogging China" in the 5G stakes and creating jobs in the heartland have been carefully tailored to chime with the political agenda of one Donald J. Trump. The Department of Justice helped quash this marriage in 2014, but T-Mobile CEO John Legere's "audacious" strategy this time-around is "pushing all the right buttons".

City talk

"Callous though it sounds", the rescue of House of Fraser is "not necessarily a Good Thing", says Jim Armitage in the Evening Standard. The struggling department store has been thrown a lifeline by "mysterious, illogical" China-based financiers, enabling it to limp on when by rights it should go to the wall. The rescue only "piles unnecessary competitive pressure" on struggling peers M&S and Debenhams, "which have a far better hope of being turned around" so long as they can shed "dozens" of unnecessary stores. "Survival of the sickest upsets the natural order of things."

Ironically enough, Apple chose May Day to remind the world that it remains "among the most astute of capitalists", says Dan Gallagher in The Wall Street Journal. The market has been worrying about slowing iPhone sales, but the product remains "awfully lucrative". Second-quarter results showed a modest 3% year-on-year increase in iPhone sales, but revenue was up 14%, boosted by the launch of the high-priced iPhone X. Investors will also be happy that Apple is ploughing its "huge offshore cash hoard", unlocked by US tax changes, into a $100bn share buyback and a 16% dividend hike.

Aviva relied too much on "clever lawyers" when it said in March that it had the right to cancel its £450m-worth of outstanding "irredeemable" preference shares and repay holders at par instead of the market price, says the FT's Matthew Vincent. Cue a price crash as "nearly 2,000 investors sold in a panic". The insurer then backtracked on the plan. Now, after some "strong feedback and criticism", it will rightly pay £14m in compensation to those who suffered losses when they sold.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.