The parent companies of both Sainsbury’s and Asda have agreed terms in relation to a proposed merger that would create one of the UK’s biggest retail groups, with combined revenues of around £51 billion.
The combination of J Sainsbury’s plc and Asda Group Limited – which is owned by US retail behemoth Walmart – would heighten the competition with Tesco, currently the UK’s largest retailer with annual sales of £54 billion in both turnover and market share.
Tesco currently holds 27.6 per cent of the UK’s grocery market, while Sainsbury’s and Asda hold 15.8 per cent and 15.6 per cent respectively.
The proposed Sainsbury’s-Asda merger first grabbed headlines over the weekend when it was revealed that both J Sainsbury’s and Walmart were in advanced stages of negotiations.
Further details were unveiled this morning alongside J Sainsbury’s unaudited full year results for the year ending March 10.
The proposed deal would result in Walmart holding 42 per cent of the new combined Sainsbury’s-Asda business, but it would not hold more than 29.9 per cent of the voting rights.
The US company would still have two seats on the board as non-executive directors of the new business entity, and it would also receive a £2.975 billion payment – valuing Asda at approximately £7.3 billion on a debt-free, cash-free and pension-free basis.
The proposed merger also states that both the Sainsbury’s and Asda brands would be maintained.
The new combined business would be led by Sainsbury’s chief executive Mike Coupe and chief financial officer Kevin O’Byrne.
Asda would continue to be run from Leeds by current chief executive Roger Burnley, who would join the board of the new combined business.
Coupe has insisted that no employees would be affected and no store closures would be made as a result of the tie-up.
“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,” he said.
“It will create a business that is more dynamic, more adaptable, more resilient and an even bigger contributor to the UK economy.
“Having worked at Asda before Sainsbury’s, I understand the culture and the businesses well and believe they are the best possible fit.
“This creates a great deal for customers, colleagues, suppliers and shareholders and I am excited about the opportunities ahead and what we can achieve together.”
Walmart president and chief executive Judith McKenna added: “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.
“It will unlock value for both customers and shareholders, but, at the same time, it’s the colleagues at Asda who make the difference, and this merger will provide them with broader opportunities within the retail group.
“We are very much looking forward to working closely with Sainsbury’s to deliver the benefits of the combined business.”
In order for it go ahead, the proposed merger needs to to receive approval from the Competition and Markets Authority, which recently gave the green light to both Tesco’s £3.7 billion takeover of supplier and convenience retailer Booker, and Co-op’s £143 million takeover of Nisa.
Sainsbury’s and Walmart expect completion of the deal in the second half of 2019.
Meanwhile, Sainsbury’s full-year report showed that underlying profit before tax increased 1.4 per cent year-on-year to £589 million, boosted by a second-half profit increase of 11 per cent.
Coupe said this was driven by efficiency savings across the company, the rapid rolling out of Argos concessions within Sainsbury’s stores, as well as improving food margin trends and investing £150 million to lower food prices.
However, on a statutory basis profit before tax fell year-on-year from £503 million to £409 million.
Total group sales increased nine per cent year-on-year to £31.73 billion but underlying basic earnings per share decreased 6.4 per year-on-year to 20.4 pence per share.
Sainsbury’s said this reflected the impact of a full year’s consolidation of the additional shares issued from its £1.4 billion takeover of Argos and Habitat in 2016.
Profit expectation for the company’s 2018/19 fiscal year is in line with current market consensus of £629 million.