Sainsbury’s shares up 15% as it strikes deal to acquire Asda

J Sainsbury, the UK's second-biggest food retailer, has struck a deal to take over Walmart subsidiary Asda, creating Britain's biggest grocer by market share.

Walmart would receive almost £3 billion in cash and 42 per cent of the combined business in return for selling Asda, which is valued at £7.3 billion (€8.3 billion) under the terms of the agreement announced on Monday.

Walmart paid £6.7 billion for Asda in 1999.

US-based Walmart has agreed to hold no more than 29.9 per cent of the total voting rights in the combined business.

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Shares in Sainsbury’s were up almost 15 per cent in late afternoon trading, with some hedge funds racing to cover short positions.

The deal marks an ambitious attempt to reshape the UK retail market, in which the traditional big four retailers – Tesco, Sainsbury's, Asda and Morrisons – have come under pressure from German discount chains Lidl and Aldi in food, and from homegrown rivals along with internet retailers such as Amazon in general merchandise.

The combination of Sainsbury’s and Asda would control almost a third of the UK grocery market, putting it ahead of Tesco.

The combined business will be chaired by Sainsbury's chairman David Tyler and led by its chief executive Mike Coupe and chief financial officer Kevin O'Byrne. Asda will continue to be run from Leeds, with its own chief executive.

‘Transformational opportunity’

“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.

The last big deal by Sainsbury’s, which has a market value of £5.9 billion, was its £1.4 billion purchase of Argos in 2016.

Both the Sainsbury’s and Asda brands will be maintained and the companies said there were no planned store closures or disposals as a result of the combination.

The UK's Competition and Markets Authority said on Monday it was likely to review the combination.

Analysts were split over the prospect of enforced store disposals. "This deal could easily unravel acrimoniously if the CMA sticks to its old rules and parameters," said Bruno Monteyne at Bernstein, adding that disposals of more than 13 per cent of the combined estate would derail the benefits of the merger.

However, Stewart McGuire at Credit Suisse said he "found only nine Asda stores that are within 3km of a Sainsbury's supermarket and where there are no other major competitors", suggesting disposals could be limited.

David McCarthy, head of European consumer research at HSBC, said: "The proposed merger with Asda has a better chance of being passed now than a decade ago. Aldi and Lidl combined have opened well over 1,000 stores in the past 10 years or so and provide extra choice to many consumers."

Rebecca Long-Bailey, shadow business secretary, said the CMA should examine the potential impact on suppliers “as a matter of urgency” and warned about the prospect of an “emerging monopoly”.

Mr Coupe said the Qatar Investment Authority – its largest existing shareholder with a 22 per cent stake – supported the deal, noting it had "gone on record, which is unusual".

Sainsbury’s brought forward its full-year results announcement from Wednesday. Underlying pretax profit for the year to March 10 was £589 million, with the total dividend lifted 8 per cent to 10.2p. Profit expectations for 2018-2019 are £629 million, in line with current consensus forecasts.– Copyright The Financial Times Limited 2018