Sainsbury’s hopes of taking over Asda have been dashed by the competition watchdog.
The two retail giants announced plans for a £13bn tie-up last April, but the Competition and Markets Authority (CMA) has blocked the deal - prompting Sainsbury’s shares to sink to the bottom of the FTSE 100 leaderboard today.
So what went wrong?
Subscribe to The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.
Why did the supermarkets want to join forces?
A merger of Sainsbury’s and Asda, the UK’s second- and third-largest supermarket chains, would have created “a grocery powerhouse overtaking Tesco as the No. 1 player in the sector”, according to Sky News. And that would have put the duo in a much stronger position to compete with German discounters Aldi and Lidl, as well as online rivals including Amazon.
The two companies estimated that the merger would generate about £500m per year in savings, and claimed it would also lower some prices for consumers as a result of better deals with suppliers.
Under the plan, Asda’s parent company, Walmart, would have transferred all Asda shares to Sainsbury’s in return for cash and a stake in the merged company. The two supermarkets would have continued to operate as separate brands, but within a new group with the largest share of the grocery market, at an estimated 31.4%.
Why has the plan faltered?
An initial investigation by the CMA, released in February, found that the merger could push up prices and reduce quality in store and online. The watchdog identified 629 areas where there could be a substantial reduction in competition in supermarkets, and a further 290 online.
The two grocery chain giants were given time to respond to these points but in its newly published final report, the CMA reports: “We have concluded that there is no effective way of addressing our concerns, other than to block the merger.”
The watchdog said it had “carefully reviewed” the supermarkets’ pledge to cut some prices. “However, detailed analysis of the impact of the deal clearly showed that, overall, the merger would reduce competition in the market and is more likely to lead to price rises than price cuts,” it added.
What happens next?
Sainsbury’s share price slid by more than 6% following the announcement of the decision to bring the “game-changing” merger to a “screeching halt”, said Connor Campbell of City firm SpreadEx.
“It also leaves the supermarket barely hovering above £2.10, and means next week’s full year results are going to make for interesting reading,” he told The Guardian.
The two supermarkets said they had “mutually agreed to terminate the transaction” and accused the CMA of “effectively taking £1bn out of customers’ pockets”. Both retailers said they would continue to focus on quality, service and value.
Mike Coupe, chief executive of Sainsbury’s, said: “The specific reason for wanting to merge was to lower prices for customers. The CMA’s conclusion that we would increase prices post-merger ignores the dynamic and highly competitive nature of the UK grocery market.”
However, Neil Wilson, chief market analyst at Markets.com, told ITV News that the merger had never looked likely to pass the CMA’s tests and that “this could well be the time for Coupe to exit”.
Create an account with the same email registered to your subscription to unlock access.