Feb 21, 2019
For Sainsbury and Asda, watchdog's analysis leaves merger in serious doubt
Feb 21, 2019
Sainsbury's planned £7.3 billion takeover of Walmart's Asda can only be salvaged if Britain's competition regulator fundamentally changes its analysis of Britain's grocery market, experts said on Thursday.
That's unlikely, say competition lawyers, analysts and company insiders, so the proposal will most likely fail.
The Competition and Market Authority's (CMA) provisional view, published on Wednesday, was the deal should be blocked in the absence of the sale of a large number of stores, or even one of the brands.
It acknowledged the two companies were unlikely to be able to address its concerns.
"The only way you get there is you have to have the CMA do a fundamental u-turn on the way they’ve appraised it,” said one person familiar with Sainsbury's thinking. “And if they (the CMA) are playing the politics, then there’s no chance they’re going to do that."
Sainsbury and Asda have until March 13 to respond to the CMA's provisional findings and until March 6 to respond to its suggested divestment remedies. The CMA will then publish its final report by April 30.
Competition lawyers said there are few precedents for the CMA to dramatically revise its findings between provisional and final reports.
Sainsbury and Asda's key argument has been that Britain's grocery market is changing rapidly, driven by the growth of online and a broader range of competitors, most notably discounters Aldi and Lidl.
However, the CMA effectively said that while new entrants are a force, it is the big four grocers - market leader Tesco, Sainsbury, Asda and Morrisons - who are most in competition with each other, making the Sainsbury-Asda deal a "four to three" merger.
Lawyers said Sainsbury and Asda would have to come up with new evidence to change the CMA's thinking.
"Sainsbury’s-Asda would need to pull something out of the bag, or they'd need to show that the CMA has completely got its figures wrong," said Alex Haffner, partner and head of competition at law firm Fladgate LLP.
"All they can realistically hope to achieve between now and the CMA’s reporting deadline is to eat away at the size of the divestments required. They are undoubtedly facing an uphill challenge to make it work," Haffner said.
Analysts at Barclays said prior to Wednesday's ruling they had assumed a 67 percent chance of the deal proceeding. They now see a minimal chance of success.
They highlighted the CMA's view that any "remedy stores" would have to be sold to a single buyer, would have to be solely Sainsbury's or solely Asda's, not a mix, and be accompanied by the sale of either the Sainsbury or Asda brand name.
"Any one of these constraints would be painful - together they leave us sceptical that any viable package could be found," they said, arguing Amazon was the only company they could imagine being interested in buying so many stores.
But they cautioned that facilitating Amazon's scaling up in UK grocery might cost Sainsbury more in the long term. Amazon declined to comment.
If the CMA's final report differs little from its provisional findings, Sainsbury's and Asda's last chance would be to challenge the ruling through the Competition Appeal Tribunal, a specialist judicial body.
Sainsbury Chief Executive Mike Coupe has said the company would take that route if it believed any ruling was not backed up by published evidence.
Coupe, as the architect of the deal, could come under investor pressure if it fails. However, analysts speculated Sainsbury would be reluctant to jettison him given Chairman David Tyler is due to step down in March, or soon after, to be succeeded by Martin Scicluna.
Meanwhile failure of the deal would block one potential exit route from Britain for Walmart. Analysts have said the U.S. group might instead consider a stock market listing of Asda or try to sell it to private equity.
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