Sainsbury should scrap Asda deal

Sasda is looking more like Sad-sda after UK regulators said they could block the proposed combination of J Sainsbury Plc and Walmart Inc.’s British subsidiary, Asda.
The Competition and Markets Authority’s (CMA) findings are more onerous than even the worst case scenarios that the two companies or financial analysts had mapped out.
But they do have a silver lining for Sainsbury Chief Executive Officer Mike Coupe. They make it easier for him to walk away from a deal that is looking much more of a headache than he anticipated when he triumphantly announced the 7 billion pound purchase back in April.
The CMA recognised that Aldi and Lidl do compete, but not to the extent of the remainder of the big four supermarkets, Tesco Plc and Wm Morrison Supermarkets Plc.
Officials also applied a much more stringent test of the incentive of the two companies to raise prices than in other recent cases.
All in all, competition could be affected in 629 local areas, even more than the 463 that the CMA outlined in the first phase of the competition.
To address its concerns, it could block the deal, force the combined group to sell off one of its brands, or require a significant number of store disposals.
Coupe attacked the findings as “outrageous.”
His view has merits. Aldi and Lidl are continuing to gain share. What’s more, with the two privately owned companies snapping at the heels of the big supermarkets, it is difficult to see how any grocer could raise prices significantly.
The CMA’s findings are in stark contrast to its ruling, in late 2017, on Tesco’s purchase of Booker. It waived this 4 billion pound transaction through without demanding any concessions. That looked unduly lenient. This time around, its conclusions look
unnecessarily harsh. Though that doesn’t make things any better for Coupe, he has actually avoided two outcomes that would have been worse.
The first would have been having to manage a requirement for store disposals that is high, but not quite so brutal. This would have stretched the economics of the deal, but not been terminal. The choice of whether to continue would be much more finely balanced.
The second would have been a requirement for Sainsbury to make disposals, but then be unable able to find buyers for those stores. That would have made the grocer simply look incompetent. Sainsbury’s performance weakened since the merger was announced, and what Coupe really needs to do is improve the underlying business. Focusing on this, rather than battling with the CMA or trying to renegotiate the terms with Walmart, looks the best course for the grocer.
Sainsbury clearly has the most to lose. It could persuade a private equity buyer to consider a purchase of Asda. That’s not the case for Sainsbury. The prospects for a buyout are less clear-cut, although it may be a tempting opportunity for Amazon.com Inc. The CMA has given him a way out. He should use it.
—Bloomberg

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times