Watchdog leans towards blocking Sainsbury-Asda merger

The UK competition watchdog has "extensive" concerns over the proposed £13bn merger between Sainsbury's and Asda, warning of the potential for pushing up prices and reducing ranges in hundreds of local areas.

The Competition & Markets Authority suggested possible remedies including selling off one of the Sainsbury's or Asda brands, divesting large chunks of stores or even prohibition of the merger.

A joint response statement from the two supermarket groups said that they "fundamentally disagree" with the provisional findings and would "continue to press our case in the coming weeks".

Shares in Sainsbury's fell more than 15% to 242.9p on Wednesday morning.

The CMA, which has called for industry responses to its suggested remedies by 6 March and final responses from Sainsbury's and Asda by 13 March, found a "substantial lessening of competition" at both a national and local level. Specifically, there was a substantial lessening of competition for the supply of groceries in 629 local areas where both parties are present, for online groceries stores in every location and for convenience stores in every location where an Asda convenience store is present.

HARSH REMEDIES

While the two supermarket groups, the second and third largest in the UK, claim that the merger would lead to major efficiencies that would allow them to cut in-store prices by around an average of 10%, the CMA seemed sceptical.

As a conclusion to its long list of concerns and potential remedies, the CMA proposed the pair "sell off a significant number of stores and other assets - potentially including one of the Sainsbury's or Asda brands - to recreate the competitive rivalry lost through the merger".

But the CMA said, even with divestitures of stores or brands, its current view is that "it is likely to be difficult for the companies to address the concerns it has identified”.

Stuart McIntosh, chair of the group carrying out the CMA investigation, said: "These are two of the biggest supermarkets in the UK, with millions of people purchasing their products and services every day. We have provisionally found that, should the two merge, shoppers could face higher prices, reduced quality and choice, and a poorer overall shopping experience across the UK."

The reaction from Sainsbury's, whose chief executive Mike Coupe was infamously caught on camera singing 'We're in the money' to himself in a TV studio last year, was to call into question the reasoning and methodology that the authorities had used in carrying out the investigation, saying the provisional findings "misunderstand how people shop in the UK today and the intensity of competition in the grocery market".

"The CMA has moved the goalposts and its analysis is inconsistent with comparable cases," Sainsbury's said, reiterating its view that a combination with Asda would create the cost savings in order for it to lower prices, pointing to the savings being "independently reviewed by two separate industry specialists" and expressing that it was "surprised that the CMA would choose to reject the opportunity to put money directly into customers' pockets, particularly at this time of economic uncertainty".

LAUGHABLE REACTION?

Analyst Clive Black at Shore Capital said this angry reaction was "bordering on laughable" and that Sainsbury's "looks like it has misunderstood the consumer and the CMA".

He said the CMA's indication that it could reject the proposed merger would "potentially create retail history" and, while time will tell if Sainsbury and Asda can argue and legally challenge the CMA’s findings, "the deal looks to have suffered a mortal blow; the CMA struggles to see how remedies can deliver its view of a competitive UK market."

Black said it was a "major blow" for Sainsbury’s shares and one that removes the merger premium, and so he downgraded his rating to 'sell' from 'hold'.

Reading the full list of the CMA's concerns, including a worse experience for shoppers and a reduction in the range and quality of products, Neil Wilson at Markets.com said what was more surprising "is the hubris that lead Sainsburys to this point, and the fact that Sainsbury’s clearly thought the CMA’s bizarre decision to green light the Tesco takeover of Booker was enough to base its decision to press ahead with this merger".

Wilson acknowledged that there was one major area of the report that did warrant further examination: "Maybe the CMA should factor in discounters more in its assessments - it's fascinating that the main reason behind this defensive major has not really factored in the CMA's assessments."

SHOULD SAINSBURY'S GIVE UP, OR WILL WALMART?

Even so, Russ Mould, investment director at AJ Bell, said such resistance from the CMA at this stage in its review "would suggest there is little chance of Sainsbury’s and Asda coming together. The language used in the CMA’s announcement implies the merger will be blocked."

He expected Sainsbury’s to keep fighting, "particularly as its own business desperately needs the Asda deal to inject a bit of life into the company", but questioned whether it was worth bothering and suggested management "should just give up now and get back to the day job”.

The fall in Sainsbury shares suggests the market is concerned Walmart may now seek to sell off Asda to another party, said analyst Laith Khalaf at Hargreaves Lansdown.

While the regulator left the door open for the supermarkets to sell off assets to complete the deal, he said the supermarkets will "have to bend over backwards if they want to proceed with the merger, and even then, wouldn’t be guaranteed a favourable ruling from the CMA", with competition in the online delivery market putting pressure on them to get rid of one of the brands, reducing their ability to target different customer bases.

"They also have to find a suitable buyer for the assets on sale, one who is big enough to provide proper competition in the eyes of the regulator. There’s an incredibly delicate balance to be struck here, because the CMA is also concerned that if the supermarkets do sell enough assets to proceed with the merger, the combined entity may damage competition by being too weak, rather than too strong," Khalaf said.