J Sainsbury, the UK’s second-biggest food retailer, has struck a deal to take over Walmart subsidiary Asda to create Britain’s biggest grocer by market share.
Walmart will get nearly £3bn in cash and 42 per cent of the newly combined business in return for selling Asda, which is valued at £7.3bn under the terms of the agreement announced on Monday morning. Walmart paid £6.7bn for Asda in 1999.
US-based Walmart will not hold more than 29.9 per cent of the total voting rights in the combined business. Shares in Sainsbury’s jumped 18 per cent to 318p in opening trading in reaction to the deal.
Both the Sainsbury’s and Asda brands will be maintained, but buying benefits and the opening of new Argos branches inside Asda stores are expected to generate at least £500m of annual synergies.
“There are no planned Sainsbury’s or Asda store closures as a result of the combination,” the two companies said.
However, the UK’s competition watchdog may take a different view. Some analysts believe up to 15 per cent of the combined store estate may need to be sold to rivals in order to secure regulatory approval.
Based on their current market shares, the combination of Sainsbury’s and Asda would control almost a third of the UK grocery market, putting it ahead of long-time market leader Tesco.
The combined business will be chaired by Sainsbury’s chairman David Tyler and led by the Sainsbury’s chief executive Mike Coupe and chief financial officer Kevin O’Byrne. Asda will continue to be run from Leeds with its own chief executive.
“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,” said Mr Coupe. “Having worked at Asda before Sainsbury’s, I understand the culture and the businesses well and believe they are the best possible fit.”
Judith McKenna, president and chief executive of Walmart International, said: “We believe this combination will create a dynamic new retail player better positioned for even more success in a fast-changing and competitive UK market.”
In the UK, the traditional “big four” supermarkets — Tesco, Sainsbury’s, Asda and Morrisons — have seen profit margins come under pressure from competition from German discounters such as Aldi and Lidl. The pair have sharply increased their market share as Britons’ spending power has been constrained by weak wage growth. In the US, the recent acquisition of Whole Foods by Amazon has promised more disruption.
Rebecca Long-Bailey, shadow business secretary, on Monday called for the Competition and Markets Authority to examine the combination of Sainsbury’s and Asda “as a matter of urgency” because of its potential impact on suppliers.
The Labour MP said the deal risked squeezing competition in a market that was already dominated by a small handful of players and warned about the prospect of an “emerging monopoly”.
“It will be British shoppers that suffer from rising prices and British workers that may be fearing for their jobs if this goes ahead without adequate oversight and investigation,” she said.
The expected intervention by the CMA would be one of its biggest probes since the watchdog was set up in 2014.
Sainsbury’s brought forward its full-year results announcement from Wednesday. Underlying pre-tax profit for the year to March 10 2018 was £589m, with the total dividend lifted 8 per cent to 10.2p. Profit expectations for 2018/19 are £629m, in line with current consensus forecasts.
Total grocery sales grew 2.3 per cent over the year, while general merchandise sales fell 0.8 per cent. Same-store sales advanced 1.3 per cent, excluding fuel. In the final quarter, they were up 0.9 per cent.
It said the integration of Argos, acquired in 2016, was ahead of plan, with 280 Argos stores expected to be open in Sainsbury’s by the end of the current fiscal year, against a plan of 250. The £160m of expected synergies will be delivered six months early.
However, profits at Sainsbury’s Bank will fall sharply this year owing to pressure on net lending margins, new accounting standards and interest payments on additional capital.
The company also said it would start the search for a new chairman, given that David Tyler has been with the company for eight years. A new UK corporate governance code drawn up last year recommends that chairmen step down after nine years on a board.