Sainsbury’s-Asda merger hits the right notes
LAST week was a busy one for company results, with HSBC, Apple and BP all releasing numbers. But none of these supplied the big story of the week.
News of a potential deal started to trickle through over the weekend, and on Monday, Sainsbury’s confirmed its intention to merge with Asda.
The share price rose sharply on the news – meaning shareholders were very much “in the money”.
Sainsbury’s also released full year results on the same day, but the price move was more a reflection of the potential value in combining Sainsbury’s and Asda. In any case, results were steady rather than spectacular. The main headline was pre-tax profits of £589m – slightly ahead of prior expectations and the dividend was held at 10.2p per share.
We suspect that even if results were more eventful, the Asda news would have overshadowed them anyway. The deal has the potential to transform the group’s fortunes. But it comes with a few conditions attached.
Firstly, it’s possible competition authorities will block the deal. The combined group will have over 30 per cent market share, which would see it surpass current market leader Tesco.
CEO Mike Coupe says he’s confident no store closures are needed, but it’s difficult to imagine the deal going through without a hitch.
The second question is how the group will deliver £500m of annual cost savings, while simultaneously lowering prices. It’s a big ask. The enlarged group will seek to use its increased scale to improve purchasing power, and cut duplicate logistical costs.
If Sainsbury’s can get the deal through without too many amends, the combined group has the potential to be far greater than the sum of its parts. Inserting Argos outlets into Sainsbury’s stores has proven successful so far, and repeating the trick with Asda should be straightforward enough.
The potential benefits are clear, but the deal is a complex one, and Sainsbury’s don’t expect it to complete until late in 2019. Investors should avoid getting too carried away just yet.
“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”