Sainsbury’s Needs A Clean Up On Aisle Three

Regulators threaten to block Sainsbury's and Asda merger

Image source: Leon Rafael - Shutterstock

What's going on?

Shares of British grocer Sainsbury’s fell 17% on Wednesday – it’s posed in an awkward stance: regulators might not approve its much-anticipated merger with Walmart’s UK arm, Asda.

What does this mean?

British regulators ensure potential mergers or acquisitions don’t reduce competition and saddle consumers with unfairly high prices – and they’re concerned the overlap between Sainsbury’s and Asda’s existing stores means that “Asda-bury’s” would cause exactly that. Higher prices in-store and at the petrol pump could be accompanied by reduced product choice and quality.

Authorities granted a reprieve – their full decision comes in April. They may demand both companies sell some stores to a rival to keep the newly-merged company on its competitive toes. Though regulators caution there’s no guarantee they can be appeased.

Why should I care?

For markets: Major discounts on supermarkets’ stocks.

January grocery industry data analyzed by Goldman Sachs showed that Sainsbury’s sales growth lagged rivals, losing out to discount chains in particular. Disappointed investors may have been praying Asda would help Sainsbury’s get more competitive, partly by way of better buying terms from suppliers (as it’d be buying more products for even more stores). Shares of smaller grocer Morrisons fell too, likely amid dashed hopes that fewer competitors would boost its own profits thanks to less promotional spending. Investors also sold shares of Asda’s parent company, Walmart, down 3% – no deal means less cash to fuel its growing ecommerce business.

The bigger picture: Merging’s hard to do.

Companies can agree on a deal price and terms – though Sprint and T-Mobile US took years. But then they must convince local regulators to tolerate a new leviathan. US regulators approved a monster-mash of huge and oft controversial mergers last year. Across the Atlantic, however, European Union competition regulators derailed the long-awaited merger between Alstom and Siemens’ train manufacturing business earlier this month despite the competitive threat from a state-backed Chinese behemoth.

Originally posted as part of the Finimize daily email.

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