Sainsbury's-Asda synergies could be £1.5bn, Berenberg says

Sainsbury’s management is guiding for £500m of net synergies after disposals and reinvestments from the deal but Berenberg said this number was “very conservative”. The benefits of buying Asda from Walmart could add up to a gross £1.5bn, the analysts said. Berenberg reiterated its ‘buy’ rating on Sainsbury’s and increased its price target to 369p from 300p.

“The net synergies number does not include any return on synergy reinvestments, which could drive a virtuous cycle of growth’ the analysts said. “We also see significant e-commerce opportunities in both food and non-food, as the group benefits from Walmart’s technology and innovation with limited requirement for capex.”

Despite this, Sainsbury’s shares trade at a 20-30% discount to the sector and deserve a rerating, Berenberg said.

Risks related to the deal from a potential competition inquiry are overestimated, the analysts said. Space in the industry has grown by 40% since 2008 and there is minimal regional overlap between the two brands to bother the Competition and Markets Authority. The maximum hit to earnings from disposing of stores is £250m – a fraction of the gross synergy opportunity, Berenberg said.