Sainsbury’s share price has slumped by almost 5% this morning after the supermarket giant’s merger with Walmart-owned Asda was blocked by the regulator. The two supermarket chains, which are the UK’s second and third largest after Tesco, have been trying to gain approval from the UK’s competition regulator for around a year now. Fierce competition in the UK groceries sector led the two chains to reach the conclusion that the scale of a new combined entity was their best route forward but the strategy now appears dead in the water.
The verdict delivered by the Competition and Markets Authority ruled that a merger, even one that involved the forced sale of a significant number of supermarkets, would result in “substantial lessening of competition”, both locally and nationally. The implication is that allowing the merger to go ahead would be expected to result in higher prices for shoppers. Sainsbury’s and Asda had argued that the economies of scale a merger would achieve would enable them to offer better prices.
What appears to be the final nail in the coffin for the merger is not exactly a surprise. Provisional findings published by the regulator in February had already raised concerns more than substantial enough to suggest the move was on the brink of collapse.
It will come as a major blow to Sainsbury’s chief executive Mike Coupe, who had put his neck and reputation on the line in pushing for the merger. It’s also a setback to U.S. retail giant Walmart’s plans to dial down its exposure to the UK.
Mr Coupe reaction to the CMA’s final ruling, and reasoning that it would reduce completion to the detriment of the end customer, was predictably scathing:
“The specific reason for wanting to merge was to lower prices for customers. The CMA’s conclusion that we would increase prices post-merger ignores the dynamic and highly competitive nature of the UK grocery market. The CMA is today effectively taking £1 billion out of customers’ pockets.”
It also stands in stark contrast to that issued by Stuart McIntosh, chair of the CMA enquiry:
“It’s our responsibility to protect the millions of people who shop at Sainsbury’s and Asda every week. Following our in-depth investigation we have found [that] this deal would lead to increased prices, reduced quality and choice of products, or a poorer shopping experience for all of their UK shoppers.
“We have concluded that there is no effective way of addressing our concerns other than to block the merger.”
However, the official response to the verdict has been a mutually agreed termination of the transaction.
Sainsbury’s shareholders will be left wondering where the collapse of the deal now leaves the company’s long term strategy. The UK groceries market has become particularly cut throat since the entry of German no-frills operators Lidl and Aldi and margins are extremely pressed. Of the ‘big’ 4 operators of Tesco, Sainsbury’s Asda and WM Morrison, Tesco has emerged from a tough few years in best health and its share price has had a strong start to 2019.