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Regulators main hurdle to Sainsbury’s/Asda deal, say analysts

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Analysts have given a cautious welcome to the proposed tie-up between Sainsbury's and Asda, but admit getting through the competition watchdog will still be a major hurdle.

The two groups announced a merger this morning, creating a new supermarket giant with combined revenues of over £50bn. No store closures are planned and the group expects to retain the Sainsbury’s and Asda brands. However, it expects to use its stronger purchasing power to deliver lower prices, up to 10%, on many frequently-bought products.

Sainsbury’s shares spiked up to 20% higher on the news.

Joshua Mahony, market analyst at IG, said: “While some investors shudder at the prospect of cumbersome mergers that benefit leadership rather than shareholders, it is clear that markets consider the possibility of a deal between Sainsbury’s and Asda as carrying substantial benefits for both firms. There would be clear synergies and efficiencies to merging both companies, with supply chain and logistics benefits driving down costs. The big question is whether such a deal would drive up costs amid a lessening of competition, or allow for lower prices as the two.”

However, he said there was still a major hurdle to overcome in the form of a likely review from the UK’s competition watchdog, the Competition and Markets Authority (CMA).

Laith Khalaf, senior analyst at Hargreaves Lansdown, agreed the stance of the CMA will be critical to the viability of the deal. He added: “The recent approval of Tesco’s takeover of Booker group may give some cause for confidence, though that deal was a vertical rather than a horizontal integration, with neither company competing directly in their key markets.

“That’s not the case for Sainsbury’s and Asda, though the fact that they have complementary regional footprints will mitigate in their favour. The competition authorities will also note that the combined supermarket will still only have around the market share of the industry leader, Tesco, in a sector where dominance has been brutally eroded by Aldi and Lidl. If Sainsbury’s can demonstrate the merger will create lower prices for customers, that will help too.”

He believes the prospect of Sainsbury’s, Asda, and Argos working together, with Walmart (owner of Asda) chipping in too, would be a ‘pretty powerful combination’.

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