J Sainsbury and Asda are "very unlikely" to appeal against the verdict of the UK competition regulator on their proposed merger, according to people briefed on the two companies' intentions.
The Competition and Markets Authority (CMA) will publish its final report on Thursday into the £7bn takeover of Asda, the UK's third-largest supermarket chain, by its larger rival Sainsbury's. But its initial findings, revealed in February, were so draconian that almost nobody believes the transaction could now proceed.
The two companies issued a robust riposte to those conclusions, accusing the CMA of basic arithmetical errors and significant deviations from past precedents. They also publicly pledged to cut prices in stores by £1 billion (€1.15 billion) over three years after the deal. But most observers believe there is little chance of the regulator revising its conclusions to an extent that would make the transaction viable.
“An appeal is still an option, but I would regard it as very unlikely,” said one person with knowledge of the position.
Any appeal would have to be initiated within four weeks of the CMA’s final verdict, and would be heard by the Competition Appeals Tribunal, a specialist judicial body.
But analysts also believe that Sainsbury’s will abandon its pursuit of Asda and use its full-year results announcement on May 1st to outline a range of initiatives aimed at boosting sales and profitability.
“It will be back to business as usual,” said Bruno Monteyne, an analyst at Bernstein. “People will be asking: you said you would cut prices by 10 per cent if you did the merger, now are you prepared to do that with your own margin?”
Performance
Sainsbury's recent sales growth has been among the weakest of the big four supermarkets as it battled a resurgent Tesco and the encroachment of Aldi and Lidl into its middle-class customer base.
Sales growth has also slowed at Argos, the general-merchandise retailer it acquired in 2016.
Asda, by contrast, has recovered some momentum after cutting prices and improving its own-label ranges.
Walmart, which owns Asda, has remained tight-lipped about its intentions following the CMA’s initial findings. But one person with connections to Asda said it was more likely that the US giant would recommit to its UK subsidiary than pursue a sale to private equity.
The person also noted that Roger Burnley, Asda’s chief executive since 2018, recently resigned as a director of Huddersfield Town Football Club in order to focus on his role at Asda.
“That suggests very much to me that he is staying put,” the person said.
The plan to buy Asda was initiated by Sainsbury’s chief executive Mike Coupe and developed with David Cheesewright, a former Asda executive who went on to become president of Walmart International before retiring last year. The US group would have held 42 per cent of the combined entity.
Sainsbury’s shares surged when the deal was revealed last April, with the cost savings from a combination expected to feed through to lower prices for consumers, boosting sales growth, and to better profit margins.
As the year wore on, however, it became increasingly clear that the regulator was taking a hard line. In December, the two companies went to the CAT to force the CMA to give them more time to respond to requests for information.
Sainsbury's shares gave up all their summer gains, fell sharply in March when the CMA's provisional findings were released, and have not recovered since. According to analysts at Barclays, the stock now "discounts a very low chance of merger completion" – although they cautioned there may be more downside if the proposal is definitively abandoned.
Sainsbury’s, Asda and Walmart all declined to comment. – Copyright The Financial Times Limited 2019
