April 30, 2018 / 12:15 PM / 10 months ago

Breakingviews - Sainsbury’s tries to succeed where Walmart flopped

A worker pushes shopping trolleys at an Asda store in west London, Britain, April 28, 2018. REUTERS/Toby Melville - RC16D3268480

LONDON (Reuters Breakingviews) - J Sainsbury will try to succeed where Walmart flopped. The British grocer is buying the U.S. retail giant’s Asda subsidiary for 7.3 billion pounds in cash and stock. Even after passing on some cost savings to shoppers, Sainsbury’s could make a double-digit return on investment. That’s unless demands from competition authorities eat into the benefits.

Buying its nearest rival by market share will allow Sainsbury’s to do what Walmart failed to achieve in almost two decades in the United Kingdom: challenge British market leader Tesco. The U.S. group gets 3 billion pounds in cash and 42 percent of an enlarged company with an equity value of roughly 10 billion pounds, based on Sainsbury’s closing price on Friday. It’s a partial retreat for the $258 billion giant, which paid 6.7 billion pounds for Asda in 1999.

The tie-up will produce hefty cost savings. Sainsbury’s Chief Executive Mike Coupe reckons that even after cutting the price of many products by 10 percent – and factoring in some store disposals – the merged group will generate 500 million pounds of additional EBITDA per year. The bulk of those savings will come from new buying arrangements that take advantage of Walmart’s clout with suppliers. Even after factoring in 750 million pounds of integration costs and extra capital spending, Sainsbury’s makes a 12 percent return on its investment, based on Asda’s 2017 operating profit of 720 million pounds. Little wonder that Sainsbury’s shares jumped 15 percent on Monday morning.

This assumes that everything goes to plan, though. Sainsbury’s will have to halt the slide in Asda’s operating profit, which has fallen 30 percent in three years because of savage competition between British supermarkets. The UK Competition and Markets Authority may also take a tough view of a deal that would give Sainsbury’s and Tesco more than half of the UK grocery market. Integrating supermarkets is tricky, too: when WM Morrison bought rival Safeway in 2004, the enlarged group lost more than a quarter of its market share through a combination of store disposals and integration problems, according to Bernstein analysts. Sainsbury’s may have a better chance of succeeding where Walmart failed. But it still faces many hurdles.


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