Sainsbury’s £12bn merger with Asda looks dead in the water after the competition watchdog said the deal should either be blocked or require the sale of a significant number of stores or even one of the two brands.
In a shock move, the Competition and Markets Authority (CMA) said it was unlikely the two companies would be able to address its extensive concerns about the deal.
Leeds-based Asda reacted angrily to the news saying that it fundamentally disagreed with the CMA’s provisional findings.
“The ratio set by the CMA is unprecedented. It is three times more stringent than in the Tesco/Booker ruling. It’s absolutely new territory,” said an Asda spokeswoman.
Sainsbury’s CEO Mike Coupe vowed to keep fighting for the deal and claimed the CMA has “moved the goalposts”.
In a joint statement, Sainsbury’s and Asda said: “These findings fundamentally misunderstand how people shop in the UK today and the intensity of competition in the grocery market. The CMA has moved the goalposts and its analysis is inconsistent with comparable cases.
“We are surprised that the CMA would choose to reject the opportunity to put money directly into customers’ pockets, particularly at this time of economic uncertainty.“
Analysts agreed that whilst the CMA findings were a surprise, they could see little hope of the deal now going ahead.
Richard Lim, chief executive of Retail Economics, said: “These provisional findings deliver a hammer blow to the potential tie-up between Sainsbury’s and Asda.
“Protecting the interests of consumers is paramount and the CMA chose not to mix its words with the second phase finding extensive competition concerns. The scope of any potential recommendations in the final stage may be too much to swallow for the deal to survive.“
Asda said it was too early to say whether it will take legal action.
“We want to understand the logic and continue to make our case. The CMA has changed the rule book,” said the spokeswoman.
“How is it a merger if we have to sell one of the brands?”
She denied that the merger would lead to higher prices, saying that customers wouldn’t stand for price increases. Sainsbury’s and Asda have said they could cut prices by around 10 per cent if the merger went ahead.
The CMA said it found “extensive” concerns over the planned tie-up, warning it could lead to higher prices and reduce quality and choice for shoppers across the UK.
The CMA found 629 areas where there could be a substantial reduction in competition in supermarkets and a further 290 areas where online competition could be reduced.
Analyst James Anstead at Barclays said: “Although the CMA has not outright blocked the proposed merger, we consider that it has been effectively blocked.
“The CMA believes that the proposed merger would risk creating a substantial lessening of competition in 629 local areas. Very approximately, this might indicate that 300 store disposals would be necessary to resolve the situation.
“Our model assumed around 65 store disposals and we think that 300 is certainly at the top end of what the market had expected. As a reminder, each of Sainsbury‘s and Asda have approximately 600 stores, so to sell around 300 would be very material.“
Hopes that Tesco, Morrisons and other rivals could buy up discarded stores were dealt a blow when the CMA said it believed a single buyer should acquire the stores and that the divested portfolio should be solely Sainsbury’s stores or Asda stores.
The CMA is consulting on the provisional findings and also the possible remedies, with responses due by March 13 and March 6 respectively.
It will publish its final report by April 30, having recently extended the original deadline by almost two months.
Under the merger plans unveiled last April, the combined group would be bigger than market leader Tesco with combined revenues of £51bn.