Sainsbury’s confirms merger with Walmart-owned Asda

Sainsbury’s has confirmed its intention to merge with Asda to become a subsidiary of Walmart in a deal thought to be worth an estimated £12 billion, knocking Tesco off the top spot as the UK’s largest supermarket.

L-R: Mike Coupe, CEO of Sainsbury’s; Judith McKenna, president and CEO of Walmart International and Roger Burnley, CEO of Asda.

In a statement released today, the UK supermarket confirmed its proposed deal with Walmart which will “create a dynamic new player in UK retail”.

If the deal goes ahead, Walmart will own 42% of the issued share capital of the new business and will receive just under £3 billion in cash.

Sainsbury’s and Asda had combined revenues of £51 billion in 2017, and according to the latest figures from Kantar Worldpanel, hold a 15.8% and 15.6% share of the grocery market respectively. Tesco, meanwhile, has a 27.6% share.

According to the statement, the plan is to maintain both the Sainsbury’s and Asda brands and combine their network of 2,800 Sainsbury’s, Asda and Argos (a subsidiary of Sainsbury’s) stores.

While there are no plans for store closures as a result of the deal, executives are aiming for savings of £500m, which will include opening Argos concessions in Asda stores.

The deal values Asda, which was bought by Walmart in 1999, at £7.3 billion, while before trading today (30 April), the market value of Sainsbury’s was £5.9 billion.

Both supermarkets employ a combined total of over 330,000 people with 47 million customer transactions per week.

After the deal was announced, shares in Sainsbury’s leapt by up to 20%, while shares in Tesco and Morrisons were down by around 3% when trading opened.

Sainsbury’s also announced that the new business would “lower prices by c.10% on many of the products customers by regularly”.

If granted CMA approval, the deal is expected to be completed in the second half of 2019.

The new business will be chaired by the current Sainsbury’s chairman David Tyler and led by Sainsbury’s CEO Mike Coupe and CFO Kevin O’Byrne, while Asda will continue to operate from its Leeds headquarters with its own CEO Roger Burnley, who will join the board of the new combined business.

Sainsbury’s, which bought Argos in 2016, has also released its full-year results, revealing an 8% rise in group revenue, from £26.2bn to £28.5bn, but a 19% drop in pre tax profits to £409 million.

Commenting on the news, David Tyler, chairman of Sainsbury’s, said: “We believe that the combination of Sainsbury’s and Asda will create substantial value for our shareholders and will be excellent news for our customers and our colleagues. As one of the largest employers in the country, the combined business will become an even greater contributor to the British economy. We welcome Walmart as a significant shareholder and look forward to working closely with them”.

Mike Coupe, chief executive officer of Sainsbury’s, added: “This is a transformational opportunity to create a new force in UK retail, which will be more competitive and give customers more of what they want now and in the future. It will create a business that is more dynamic, more adaptable, more resilient and an even bigger contributor to the UK economy.

“Having worked at Asda before Sainsbury’s, I understand the culture and the businesses well and believe they are the best possible fit. This creates a great deal for customers, colleagues, suppliers and shareholders and I am excited about the opportunities ahead and what we can achieve together.”

Commenting on the likelihood of the deal being granted CMA approval, Paul Hickman, analyst at Edison Investment Research said: “The CMA has first to make a decision whether the merger of the number two and three operators each having around 16% of the market is itself intrinsically anti-competitive. The decision here is complicated by the fact that Tesco already has about 28% of it, nearly twice as much as either.

“The CMA often uses a local test of proximity based on 1 mile, or 5 minutes’ drive time. We estimate that around 70 of Asda’s 630-odd stores are located within a mile of one of Sainsbury 1400 outlets. Hence local adjustments to the proposed deal could be significant. But if, in the end, around 90% of the Asda stores are nodded through, that will represent a significant win for the parties”.