Earlier today, the UK’s peak competition regulator sent shockwaves throug the City after it handed down its final verdict on the proposed £12 billion merger of Sainsbury’s and Asda.
The CMA effectively blocked the deal after hinting it would do so in its provisional findings in February, delivering a blow to the two grocery giants who wanted to combine to overtake longtime market leader Tesco.
The CMA said the proposed deal would have led to increased prices in stores, online and at many petrol stations across the UK.
The bosses of Sainsbury’s and Walmart, the US parent company of Asda, and Asda itself all expressed disappointment in the CMA’s decision.
The grocers also mutually agreed to abandon the proposed deal – which was first announced in April last year – although it is understood that Walmart will continue seek a buyer for Asda.
Shares fell 5.7 per cent on news of the CMA’s final verdict.
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It explained that shoppers would be “worse off” if Sainsbury’s and Asda were to have merged, due to price rises, reductions in the quality and range of products, and a poorer overall retail experience.
The watchdog added the deal would have resulted in a “substantial lessening of competition” at both a national and local level and that shoppers right across the UK would be affected – not just in the areas where Sainsbury’s and Asda stores overlapped.
A merger between the Sainsbury’s and Asda – the UK’s second and third biggest grocery retailers in terms of market share – would have created a company bigger than Tesco with estimated revenues of £51 billion and a network of 2800 stores under the Sainsbury’s, Asda, George, Habitat and Argos fascias.
It also would have given Walmart a way to exit the UK market, one of the weakest performers in its global portfolio despite Asda’s glowing financial figures in recent quarters.
During the CMA’s extensive investigation, fears were expressed that suppliers could get squeezed since the tie-up would give the merged entity increased buying power.
Soon after the CMA’s provisional findings, Sainsbury’s and Asda had offered to sell up to 150 stores as part of efforts to address competition concerns and claimed that shoppers would be deprived of lower prices should their merger be blocked.
The duo also pledged to make a number of post-merger commitments, such as investing £1 billion a year in lowering prices by the third year of the deal completing, equating to a 10 per cent cut on everyday items.
Here’s what retail analysts and experts have had to say in response to the CMA’s final verdict.
“The CMA have listened to the complaints about their provisional findings in February, but decided that the evidence supports their serious concerns about this deal,” said Ian Giles, a competition partner at law firm Norton Rose Fulbright.
“This is a controversial decision in competition law circles as it suggests a higher bar than had been the case in previous retail mergers.
“The parties perhaps underestimated how the scale of this deal, and the CMA’s focus on consumer markets, meant they would face such serious obstacles in securing approval.
“They had banked on arguments around discounters and online sales offsetting concerns, but these have not been successful.”
Giles added that the CMA’s decision to block the merger was expected, given its preliminary findings that the deal created significant competition concerns and was likely to be difficult for the companies to offer acceptable remedies.
“This is a controversial decision in competition law circles as it suggests a higher bar than had been the case in previous retail mergers.”
“Having found that millions of consumers could be worse off in terms of higher prices, lower choice and quality as well as overall shopping experience, the CMA set a high hurdle to secure clearance and the ‘price’ for this – selling off a significant number of stores or potentially even one of the Sainsbury’s/Asda brands – has ultimately proven a deal-breaker.
“The shifting competition policy position is also unlikely to have helped the parties’ prospects of getting the deal cleared.”
He added: “The parties have been heavily critical of the CMA’s analysis and approach, feeling they have been treated unfairly and inconsistently compared to previous retail mergers, and have received some support from independent economists that the CMA applied the wrong thresholds in its economic analysis.
“Retail mergers can be complex involving local and national issues, but there have been a number of previous cases with an established framework for analysis.
“The CMA will be sensitive to any suggestion it has acted unfairly in blocking the deal – the parties successfully challenged an unfair CMA timetable earlier in the case… Clearly, the CMA believes prohibiting the merger is fair and the right outcome for consumers.”
Catherine Shuttleworth, retail analyst and chief executive at Savvy, said: “As anticipated, the CMA have outright rejected the Sainsbury’s-Asda deal this morning on the basis that they believe that prices would increase for customers in both food and fuel.
“They say that they have looked at the changed dynamic of the marketplace which makes it all the more surprising that they really think prices would go up.”
She added: “The comments from Stuart McIntosh of the CMA this morning – that it would be difficult to track prices post the proposed merger – is completely unbelievable.
“It has never been easier to track supermarket prices. Additionally, Sainsbury’s had committed to a transparent audit of pricing by a third party post any merger.
“The more we hear from the CMA the more we should be concerned that they are not working in the best interests of consumers and clearly do not understand the market dynamics of the UK grocery sector.”
Patrick O’Brien, UK retail research director at GlobalData, said: “The CMA’s decision to block the Sainsbury’s–Asda merger puts the heat on Sainsbury’s chief executive Mike Coupe.
“The comments from Stuart McIntosh of the CMA this morning – that it would be difficult to track prices post the proposed merger – is completely unbelievable.”
“Whatever the rights or wrongs of the CMA’s decision, he appears to have wasted a year chasing an impossible dream while its competitors took full advantage of its distraction.
“Its results over the last year have been poor, with store standards falling noticeably, and it must now refocus on retail basics rather than chase another big acquisition.
“One of the key mistakes Coupe made was in failing to offer any assurances on price cuts until the CMA’s devastating provisional findings in February: it built the rationale for the merger on the rather vague notion that it would reduce prices by 10 per cent by putting pressure on major suppliers, though it didn’t make it clear how many products this would include.
“It only made some assurances of audited price investment later, but this might have had more sway if it had offered them at the start.
“The confidence Coupe placed in getting the deal past the CMA in light of its previous – generous – decision to allow Tesco to buy Booker looks like a bad misjudgement now.
“Coupe may feel hard done by, but the CMA made clear that the Tesco-Booker deal was passed because it considered the acquisition to be a vertical one, by a retailer of a wholesaler, and so viewed that the combination did not significantly damage the competitiveness of either market.”
O’Brien added that unlike Sainsbury’s, Asda has been able to manage the distraction much better and nodded to its growing sales and profits in recent quarters.
“We do not believe Walmart will want to keep Asda as it is now, and may look to sell Asda to other suitors, but it would look unlikely that other major players in the UK would consider it, given the strictness the CMA has displayed.
“It opens the possibility of private equity or floating the business, or a foreign retailer entering the market.
“Amazon will always be speculated about, but we do not believe that taking on a major physical food presence in the UK fits with its strategy, despite the Whole Foods deal.”
“The CMA made clear that the Tesco-Booker deal was passed because it considered the acquisition to be a vertical one, by a retailer of a wholesaler.”
Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said: “The CMA’s decision doesn’t come as a huge surprise, after its initial ruling demanded severe compromises if the deal was to be approved – one such suggestion was selling one of the brands altogether.
“Sainsbury’s response that it was only prepared to sell a small number of stores simply wasn’t enough to appease the competition regulator.
“This is undoubtedly a blow to Sainsbury’s, which was relying on the merger to rejuvenate what’s been a paltry performance of late.
“Sainsbury’s position in the middle of the pack makes for tough going as the supermarket space is a crowded one, and the group faces fierce competition from above and below.
“That’s partly why margins have been hovering around the 2.5 per cent mark, and the deal would have acted as a catalyst to get margins moving.
“To make things worse, there’s now scope for another buyer to invest in Asda, which would result in the chain becoming a more active competitor for Sainsbury.”
Richard Curry, partner in the retail team at property and planning consultancy Rapleys, said: “The problem Sainsbury’s and Asda faced is that there was a clear lack of credible competition for the CMA to turn to, and fewer still who would be interested in the stores that would have needed to have been disposed of.
“Sainsbury’s response that it was only prepared to sell a small number of stores simply wasn’t enough to appease the competition regulator.”
“Particularly when you factor in the fuel retail element, the only two alternatives that offer the same product range and shopping experience are Tesco and Morrisons – who are unlikely to be interested in enough of the large format stores which might have made a difference to the CMA.”
He added: “People are still waiting to see what Amazon’s next move in the UK market will be. With the Whole Foods business, and the recent partnership with Casino in Europe, food retail is an area of interest for them.
“It would be ironic indeed were Amazon to end up buying some or all of the Asda portfolio given Walmart’s exit from the UK to focus on the US is almost entirely driven by a desire to defend against Amazon on home soil.”
Mark Jones, partner at law firm Gordons, said: “Suppliers will be breathing a sigh of relief with the news the Asda/Sainsbury’s merger is not going through.
“The CMA said the risk was that customers would face higher prices. Maybe that is true but in the short term, suppliers would have been told that they have to supply the combined business at the lower of the two prices they charge Asda or Sainsbury’s, or possibly provide a new even lower price.
“That would have been the immediate effect of the merger and, thankfully for suppliers, the CMA has done them a favour.”
Roger Barron, a partner specialising in mergers and acquisitions at law firm Paul Hastings, blamed Sainsbury’s and Asda’s advisers for the failed deal.
“As an M&A practitioner you rely on the antitrust teams to assess whether or not a deal can be done,” he said.
“It does seem incredible that on this occasion the parties’ advisers seem to have got it so wrong, such that the only remedy the CMA felt it had available to it was to block the transaction in its entirety.”
Meanwhile, unions such as Usdaw and GMB cautiously welcomed CMA’s decision.
“Suppliers will be breathing a sigh of relief with the news the Asda/Sainsbury’s merger is not going through.”
Paddy Lillis, Usdaw general secretary said: “The CMA’s blocking of the proposed Sainsbury’s and Asda merger has brought to an end a period of uncertainty for staff, who have been concerned by speculation of store closures.
“We will continue to work with Sainsbury’s, Argos and Asda to grow the businesses and secure our members jobs.
“Usdaw remains deeply concerned about the operation of the CMA and we renew our call on government to change setup to ensure that workers voices are fully heard and represented in future investigations.”
Tim Roache, GMB general secretary, said: “For Asda workers, this is the right decision after the CMA’s provisional findings.
“Swathes of stores and depots would have to have been sold off, with jobs put at risk and no real benefit for customers or communities.
“The workforce has been through months of uncertainty, worrying about what’s going to happen and wondering if their stores or depots would be sold from under them.
“It’s time for Asda to move on, and to give some stability and security to the staff who work day in, day out to make the company profitable.”
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