April 25, 2019 / 10:04 AM / 3 months ago

Breakingviews - UK supermarket M&A will return in bargain bin

Shopping bags from Asda and Sainsbury's are seen in Manchester, Britain April 30, 2018. REUTERS/Phil Noble

LONDON (Reuters Breakingviews) - J Sainsbury’s proposed 7.3 billion pound takeover of Walmart-owned Asda has been shelved but UK supermarket mergers may well resurface in the future - in the bargain bin.

Britain’s competition watchdog on Thursday blocked the plan to create the country’s largest grocer, citing concerns that the deal would push up supermarket and petrol prices for shoppers. That’s a blow for Chief Executive Mike Coupe who had presented the deal as a way for Sainsbury’s to cope with rising competition.

Over the past two years, the company’s share of UK grocery sales has fallen from 16.1 percent to 15.3 percent, according to Kantar data, and it is now in third place behind Tesco and Asda. Tesco, which has muscled its way to the top of the Kantar league table for market shares, has launched cheaper offerings, such as “Exclusively at Tesco”, which Goldman Sachs analysts reckon are around 10 percent cheaper than comparable goods at German discounter Lidl. Morrisons has also cut prices on a range of products to keep customers from jumping ship to Lidl and its peer Aldi. Sainsbury’s has yet to unveil a similar offering.  

A 6 percent decline in Sainsbury’s share on Thursday increases pressure on Coupe to be more creative. One option is to trim relatively generous dividends and use the cash to launch a discount offering. The grocer’s dividend yield of 4 percent compares with Morrison’s 3 percent and Tesco’s 2.3 percent, according to data from Refinitiv. Coupe could also scale back on capital investments, which Jefferies estimates will amount to a total of nearly 2 billion pounds in the next three years.

Either option would hurt Sainsbury’s share price. If the declines are steep enough, the grocer could eventually become a takeover target. Asda is also in play. True, its U.S. owner is in no rush to offload the business. But if competition pressures increase and Asda loses market share, private equity may be able to scoop it up at a cheaper price than Sainsbury’s was willing to pay. The competition authorities may have scuppered one UK supermarket deal, but deal fever will resurface in time.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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