Giant UK supermarket chain in the making

Sainsbury in advanced talks to combine with Walmart unit

LONDON: UK grocer J Sainsbury Plc is in advanced talks to combine with Walmart Inc’s Asda in a multi-billion pound deal that would reshape Britain’s brutally competitive supermarket business.

Sainsbury confirmed the discussions in response to a Bloomberg News report and said a further announcement would be made today. The supermarket chain ranks second in the UK, followed by Asda and behind Tesco Plc.

Bringing together Sainsbury and Asda is the most radical response yet by the country’s retailers to the rise of German discounters Lidl and Aldi and the threat of Amazon.com Inc, which has muscled into the home-delivery space that’s become many Britons’ preferred way to shop.

Combining Sainsbury, with a market value of £5.9bil (US$8.1bil), with Asda would create a giant to rival or even surpass Tesco in market share, with about 2,800 stores, nearly 350,000 employees and sales of £50bil. ”There’s undoubtedly some scale benefits in buying,” said Bryan Roberts, an analyst at TCC Global. Still, a combined entity “doesn’t get rid of the problems both companies face”, Roberts said. “They still won’t be cheaper than Lidl or Aldi.”

Supermarket operators have been cutting thousands of jobs in response to a pricing squeeze exacerbated by the Brexit-induced weakness of the pound. Reported profits of leading retailers Tesco and Marks & Spencer Group Plc have more than halved in the past three years.

Compounding their woes is a switch by consumers to online shopping that’s ahead of many other countries. About 18% of retail sales take place online in Britain, compared with about 12% in the US.

For Walmart, which bought Asda for £6.7bil in 1999, the possible deal marks a further retrenchment of its international footprint as the company focuses on competing with Amazon at home. After the transaction, the US retailer would retain a significant stake in Sainsbury, according to people familiar with the situation. That would give the combined company greater clout with suppliers.

A representative for Asda declined to comment. Walmart could not immediately be reached for comment. The Qatar Investment Authority is currently the largest investor in Sainsbury, with 22%.

Sainsbury chief executive officer Mike Coupe, who previously worked at Asda and other UK retailers, has been pushing to reshape the London-based company as it wrestles with the online threat that has contributed to the demise of department-store chain BHS, electronics retailer Maplin and the UK arm of Toys “R” Us.

A combination with Asda would be Sainsbury’s second major transaction since Coupe took over four years ago. In 2016, he expanded into selling household goods via a £1.4bil deal for catalog retailer Argos. Sainsbury has about £28bil in annual revenue, compared with Asda’s £22bil.

While Tesco and other grocers have shown signs of recovering lost pricing power in recent months, Asda has suffered from the incursion of Lidl and Aldi. Long known as Britain’s lowest-priced mainstream grocer, the Walmart unit has lost a major selling point to the duo of discounters.

With a combined market share of nearly 32%, according to Kantar Worldpanel, a fused Asda and Sainsbury could surpass Tesco, with about 28%.

Weaving together Asda with Sainsbury could present challenges. The Walmart division 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. That geographical distribution limits store overlap.

Synergies could be minimal in areas like marketing if Sainsbury and Asda maintain separate brand identities, said Roberts, adding that he doesn’t expect the proposal to face major competition hurdles, but that divestitures of individual stores might be needed in areas where the two grocers overlap.

Sainsbury may have been encouraged by the regulatory response to Tesco’s recent purchase of wholesaler Booker Group Plc, which UK authorities cleared after concluding it posed no major threat to competition.

Walmart acquired Asda at a time when the US company was expanding aggressively overseas. Since then it has backed out of international markets ranging from Germany to South Korea.

Morgan Stanley and UBS Group AG are advising Sainsbury and Rothschild is advising Walmart, according to people familiar with the matter. Representatives for UBS and Morgan Stanley declined to comment while a spokesman for Rothschild didn’t immediately comment.