Barclays re-runs its numbers on Sainsbury's, upgrades to 'overweight'

Barclays said it had long thought that a merger of Sainsbury's and Asda made sense, but while the question as to whether or not competition remedies would render the proposed deal "uneconomic" remained, analysts have upgraded their rating on the FTSE 100 supermarket.

With the Competition & Markets Authority's decision likely to remain unknown until mid-2019, Barclays remained sceptical about store disposals being highly material given that both companies have taken extensive advice and were continuing to invest "considerable credibility" into the transaction.

However, having had more time to run the numbers and explore alternative scenarios, the bank's analysts chose to upgrade Sainsbury's to 'overweight' from its previous 'equal-weight' stance.

Barclays assumes EBITDA synergies of a little over £500m by year two, in line with the retailer's guidance, but noted that, just as importantly, it now forecasts that Sainsbury's core EBIT margins will "drift downwards modestly" and that ASDA's margins will fall by a further 60bps ahead of the merger.

"We believe Sainsbury is worth 400p per share on a merged basis and 285p on a standalone basis," said Barclays.

Assuming an 80% chance of the merger's success, Barclays raised its target price on the grocer from 300p to 375p.