British supermarket store proposes to acquire Walmart’s Asda for $10 billion

The potential merger, a stock and cash deal, between Britain’s second and third biggest retail groups has cost synergies of at least 500 million.

In a significant development, Britain’s Sainsbury has agreed to acquire Walmart’s Asda for around $10 billion (7.3 billion pounds); the move is likely to make it Britain’s biggest supermarket group by market share and overtake long-standing industry leader Tesco.

The synergies in the merger between Britain’s 2nd and 3rd biggest supermarket groups would generate at least 500 million pounds and enable prices to be further lowered by around 10% on many products; this will enable the combined entity to better compete with fast-growing German grocery retail stores as well as it market leader Tesco.

Sainsbury’s said the combination would generate synergies of at least 500 million pounds and enable prices to be lowered by about 10 percent on many products.

For Wal-Mart, this could be a potential opportunity, since Asda, which it acquired for 6.7 billion pounds in 1999, is struggling to grow in the last 5 years in the wake of German grocery retailers Aldi and Lidl attracting customers with discounts.

With the news reaching the market, Sainsbury’s shares surged by 21% to 327.1 pence in early Monday trading. Shares of Tesco have fallen.

If the deal, with Asda being valued at 7.3 billion pounds, goes through, Walmart will receive $4.1 billion (3 billion pounds) in cash and have a 42% stake in the combined entity.

Mike Coupe, Sainsbury’s CEO, will retain his position in the combined company, which will retain both the Sainsbury’s and the Asda brands.

Analysts view the deal as one of the best to hit the retail industry in recent times. They don’t see much opposition to the deal from antitrust regulators since Tesco’s purchase of Booker balances the playing field.

While speaking to the BBC, Coupe stated he was open to divestments however currently there were no plans to close shops and so customers would be unaffected.

“Even if we have to divest stores they will be sold as trading entities,” said Coupe.

Sainsbury’s and Asda have a combined total of 2,800 stores.

“Sainsbury’s continues to surprise us with their aggressive deal-making,” said analysts from Jefferies who have placed a “hold” rating on its stock.

According to the terms of the proposed acquisition, Wal-Mart will be locked-in for a period of 2 years. After that it can reduce its stake to 29.9%; after 4 years it can completely exit the group company.

Sainsbury’s also reported its full-year results on Monday, showing a first rise in profit in four years.

($1 = 0.7256 pounds)

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