Britain’s competition authority likely to rule on Sainsbury’s-Asda $66 billion merger in early March

With Britain’s Competition and Markets Authority taking on a more active interventional approach in its latest ruling, the Sainsbury’s-Asda deal, which could create Britain’s biggest retailer, faces headwinds from multiple angles.

Although Mike Coupe, Asda’s CEO was taped on camera singing “We’re in the money”, following Asda’s $9.4 billion merger with peer Sainsbury’s, antitrust lawyers and analysts have warned against counting your chickens before they are hatched.

In the coming weeks, Britain’s Competition and Markets Authority (CMA) is to rule on the deal which could create Britain’s biggest retailer, with an annual turnovers of around $66 billion (51 billion pounds).

Going by recent rulings by the CMA, it is very likely that it will not shy away from imposing intervening steps which could make the deal too costly to be worthwhile. However, going by Coupe and Roger Burnley’s assessment, chief executive of Walmart owned Asda, the CMA is unlikely to make the deal unpalatable.

Although the CMA is scheduled to publish its final report in early March, it could however be delayed until the end of April.

Although both, Asda and Sainsbury’s have said, they will lower prices on “everyday items” by nearly 10%, financed by cost savings from big multi-national suppliers, many have cast douts on these promises.

“Other than Sainsbury’s and Asda, it is hard to think of anyone involved in the industry that is publicly stating this takeover is not against the public interest,” said David McCarthy, an analyst with HSBC.

McCarthy believes the CMA will not pass the deal without substantial conditions, and could even block it entirety.

The key factor in the decision is whether the CMA will want the retailers to divest some of their combined 2,800 stores in order to protect competition in overlapping areas.

Asda and Sainsbury’s have declined to provide a number for potential divestitures of their brick-and-mortar stores which will make the deal less attractive.

According to a source familiar with the knowledge of the two firms’ thinking, if that figure were “into the hundreds”, it could make the deal unpalatable.

Another headwind facing the deal is finding buyers: with the retail industry moving towards online and smaller convenience shops, finding buyers is likely to be increasingly challenging.

Suppliers and industry peers, have made a raft of submissions to the CMA opposing the deal.

Many analysts have also drawn negative inference from Sainsbury’s and Asda’s pre-Christmas clash with the CMA over its refusal to give them more time to respond to evidence – a row that went to court.

Further, CMA’s recent dealings have pointed to more interventionary approach. In 2018, the CMA had indicated that it may block Experian’s takeover of rival ClearScore, and took PayPal’s $2.2 billion takeover of Swedish financial tech firm iZettle to an extended probe.

“There’s a real sense with Tyrie’s arrival the CMA want to prove that they’ve got teeth,” said a competition lawyer, who declined to be named. “They can block it by asking for a disproportionately large number of stores being divested.”

The CMA declined to comment.

Further, the pledge to cut prices could also prove to be problematic, if the CMA were to suspect that they would come at the expense of smaller suppliers.

“There is no doubt whatsoever that 10 percent reduction won’t come from your Procter & Gamble, your Kellogg’s, your Coca-Cola; that will come from medium-sized to small-sized suppliers,” said a senior grocery industry executive.

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