UK grocer J Sainsbury Plc plans to buy Walmart Inc.’s Asda in a 7.3 billion-pound ($10 billion) deal that would transform the country’s supermarket industry and leave the US retailer as the combined company’s biggest shareholder.
Sainsbury will pay Walmart 2.98 billion pounds in cash and 4.3 billion pounds in stock, the UK company said in a statement Monday detailing the terms after confirming a Bloomberg News report on the plan over the weekend. Walmart would get a 42% stake in the merged entity, Sainsbury said.
Sainsbury shares rose as much as 21% in London. Tesco Plc, the current UK grocery market leader, fell as much as 3.4%, while Wm Morrison Supermarkets Plc dropped as much as 4.4% in early trading.
The deal would create a supermarket giant rivaling or surpassing Tesco in market share, with 51 billion pounds in sales, 2,800 stores and 330,000 employees. The combined company would gain clout with suppliers, which could help it compete against Amazon.com Inc. and keep costs in check at a time when mainstream grocers face a growing threat from discounters Lidl and Aldi.
Chief Financial Officer Kevin O’Byrne struck an optimistic note in view of potential regulatory hurdles, saying the two businesses are complementary in terms of geography, and that consumers would benefit from lower prices as a result of the company’s greater scale. Sainsbury said it expects to cut prices of many frequently purchased goods by about 10 percent as a result of the deal.
“The market has changed dramatically since the last time the regulator looked at this,” the CFO said on Bloomberg television, citing the rise of discounters and online offerings.
Deal synergies
Sainsbury said it expects synergies of at least 500 million pounds from the deal and plans no store closures as a result. Sainsbury chief executive officer Mike Coupe will serve as CEO.
The target for savings is “conservative” and buying synergies alone could potentially reach 1 billion pounds, Berenberg analyst Dusan Milosavljevic said by email. Sainsbury represents a less risky investment now that Walmart and the Qatar Investment Authority, the grocer’s biggest shareholder prior to the deal, will together hold more than 50 percent of the company’s shares, he said.
Walmart will get two board seats and will be “a long-term shareholder and partner,” Sainsbury said. The US company will leverage its global reach and investment to support Sainsbury, according to the statement. Current UK market leader Tesco has used its scale to secure favorable supply deals.
Walmart, which bought Asda for 6.7 billion pounds in 1999, said in a separate statement that it expects to record a noncash loss of about $2 billion as a result of the transaction, reflecting the current value of shares it’s receiving and foreign-exchange rates.
The transaction builds on Sainsbury’s acquisition of general-merchandise retailer Argos for 1.4 billion pounds two years ago. While Coupe has defied some analysts’ expectations by successfully integrating Argos and wringing out cost savings, weaving together Asda with Sainsbury could present bigger challenges.
Different markets
Asda is favored by shoppers on tight budgets, while Sainsbury appeals to a more affluent crowd. Sainsbury has expanded aggressively into convenience stores and is focused on the south of England around London, while Asda has more large supermarkets spread across the country’s north.
While that geographical distribution limits overlap, several prominent UK politicians took to the airwaves over the weekend to call for a thorough review by the competition authorities.
There is a significant risk that the transaction will be blocked by regulators, Jefferies analyst James Grzinic said by email. The deal suggests that Sainsbury feels “very vulnerable” now that Tesco has bought wholesaler Booker Group Plc and also that Wal-Mart “wants out of the UK,” he said.
Separately, Sainsbury reported full-year pretax profit rose 1.4% on an adjusted basis to 589 million pounds, beating the analyst consensus of 573 million pounds.
Sainsbury also said it has started looking for a successor to Chairman David Tyler, who has been in his position for more than eight years. Bloomberg.
Source: Mint