Sainsbury’s Asda takeover collapses after U.K. blocks deal

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LONDON (April 25): J Sainsbury Plc and Walmart Inc’s Asda dropped their 7.3 billion-pound (US$9.4 billion) bid to create the U.K.’s largest supermarket chain, after antitrust authorities blocked the deal, saying it would lead to higher prices and less choice for shoppers.

The companies quickly raised the white flag after the Competition and Markets Authority formally rejected the combination of the country’s second- and third-largest grocery chains. The regulator had rejected Sainsbury’s offer to roll out 1 billion pounds in price cuts and sell as many as 150 stores.

“The CMA’s conclusion that we would increase prices post-merger ignores the dynamic and highly competitive nature of the U.K. grocery market,” Sainsbury Chief Executive Officer Mike Coupe said in a statement. “The CMA is today effectively taking 1 billion pounds out of customers’ pockets.”

The CMA decision is a significant blow to Coupe, who has staked his career on driving forward a deal he said would be “transformational.” Sainsbury lacks the buying power of market leader Tesco Plc and is operating in a highly competitive industry that’s been overhauled by discounters Aldi and Lidl and online food operations.

Sainsbury shares fell as much as 5.1%, after the report. Since the deal was announced a year ago, they have fallen by nearly a third.

In its final report Thursday, the regulator held off making major changes to its preliminary findings, even after the grocers accused officials of making errors in their analysis and said they were duped about a rival’s intentions.

The CMA did tweak its analysis slightly to show the combination would hurt competition in 537 local areas, down from its prior calculation of 629 problematic neighbourhoods.

“We have concluded that there is no effective way of addressing our concerns, other than to block the merger," Stuart McIntosh, who oversaw the investigation, said in a statement.

What Bloomberg Intelligence Says

Now that Sainsbury-Asda officially won’t be allowed to proceed, Sainsbury is in need of a new strategy to revive its core supermarket business, which has underperformed peers during the one-year merger process. Fears that the price reductions promised in the merger will still have to be made, hurting the low margin, are reflected in Sainsbury’s share price. — Charles Allen, Bloomberg Intelligence retail analyst

Coupe has previously said that combining with Asda would not only help Sainsbury meet looming challenges, but would also deliver cost benefits for consumers. The decision to call the deal off leaves him facing a steep challenge to convince the market that its standalone strategy can succeed.

Asda Resources

Walmart promised to continue to invest in its unit, after the decision.

“While we’re disappointed by the CMA’s final report and conclusions, our focus now is continuing to position Asda as a strong U.K. retailer,” Judith McKenna, CEO of Walmart International, said in a statement. “Walmart will ensure Asda has the resources it needs to achieve that.”

In its meetings with the CMA, Sainsbury lawyers argued the regulator made basic errors in their analysis of Asda’s store network and were duped about its rival Marks & Spencer Group Plc’s plans to enter the online grocery market, following its deal with Ocado Group Plc.

But lawyers said the sheer size of the deal meant it would always face significant regulatory hurdles. The antitrust review had been filled with tension, with Sainsbury going to court last year to get more time to respond to some of the regulator’s requests for information.

“It was always a challenging transaction, it required a leap of faith from the regulator that the market had already kicked in a new direction," said Stephen Smith, a partner at Bristows LLP in London.

Sainsbury’s market share has fallen 0.6% in the last 12 months, causing it to lose its place, as Britain’s second-largest supermarket to Asda last month. As of September, Sainsbury’s had spent 17 million pounds on legal and banking fees, according to its half-year results. Nearly 2 billion pounds has been wiped off its market value, since the merger was announced last year.