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Sainsbury’s Share Price Has Rocketed 15% But What Does Asda Merger Really Mean for Investors?

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With reports over the weekend detailing a deal that will see supermarket giants Sainsbury’s and Asda now officially confirmed, the former’s share price has leapt 15% on the London Stock Exchange today. Investors holding Sainsbury’s shares with online stock brokers might well wonder if the deal will lead to further long term gains or if now is a good time to cash out.

News that the UK’s ‘big 4’ supermarket chains (Tesco, Morrisons, Sainsbury’s and Asda) will soon become a ‘big 3’ following an agreed merger between Sainbury’s and Asda broke over the weekend. The ‘deal in principal’ has today been confirmed by both Sainsbury’s and Asda’s parent company Wallmart but is still subject to approval by Sainsbury’s shareholders and, more crucially, the Competition and Markets Authority. The combined entity, which U.S.-giant Wallmart will retain a 41% stake in, would leapfrog Tesco as the UK’s largest supermarket with market share of 31%.

The UK’s ‘big 4’ supermarkets have been losing market share to budget German competitors Lidl and Aldi in recent years. In an industry where economies of scale are crucial, those investing online in Sainsbury’s shares may well be wondering if the news means now is a good time to cash in on the best share price in a year or if the combined entity will go from strength to strength. Despite today’s leap, Sainsbury’s share price is almost 35% lower than at the end of 2013. The UK’s supermarket sector has seen profit margins squeezed by the intense competition between the traditional ‘big 4’ and the German discounters.

The merger announcement has meant Sainsbury’s annual results, also released today, have had little impact on market sentiment despite being mixed. Underlying pre-tax profit saw Sainsbury’s return to growth over the second half of the year, up 11%. However, reported pre-tax profit dropped to £409 million from £5043 million and Earnings per Share (EPS) also slipped to 13.3p from 17.5p.

The company did, however, maintain a full year dividend of 10.2p per share on Friday’s closing level, which can be considered generous. While the company’s cash generation increased by £113 million to £432 million, debt remains relatively high at £1,364m as of March 10th, despite the company managing to pay off £113 million. However, progress has also been made on Sainsbury’s EBITDAR (lease adjusted net debt to earnings before interest, tax, depreciation and rent), which dropped to 3.2 from 3.7.

The development, if approved by the Competition and Markets Authority (confidence is high that hurdle won’t be stumbling block due to the intense competition in the market), would be expected to prove to be positive for existing Sainsbury’s shareholders. Many analysts believe the consolidation between the two supermarket chains will better position Sainsbury’s to challenge Tesco, the German discounters and expected new rivals such as tech-centric colossus Amazon, which is moving into the groceries market. However, with profit margins in the sector so squeezed, most analysts are expected to keep their recommendation on the stock as a ‘hold’ rather than a ‘buy’.

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Paul

The author Paul