Britain’s CMA blocks Sainsbury’s $9.4 billion takeover with Walmart-owned Asda

Walmart’s strategy to exit Britain, one of its weakest performers in its global portfolio, has effectively been blocked. Facing limited options, here’s an examination of the issue, its implications for Walmart and a potential way around it.

In a significant development, Britain’s competition regulator blocked Sainsbury’s proposed $9.4 billion (7.3 billion pound) takeover deal with Walmart-owned Asda. The move is a major setback for Sainsbury in its bid to overtake market leader Tesco.

The ruling by Britain’s Competition and Markets Authority (CMA) is also a major setback for Sainsbury’s CEO Mike Coupe, the architect of the deal. As for Walmart, the deal represented a way for it to exit Britain, which is one of the weakest performers in its global portfolio, as it moves to revamp its international operations.

According to the CMA, if it allowed the deal to go ahead it would have resulted in significant loss of competition at both a national and local levels, thus resulting in price rises in brick and mortar stores as well as online marketplaces.

Coupe has taken issue with the CMA’s analysis.

“The specific reason for wanting to merge was to lower prices for customers,” he said in a statement. “The CMA’s conclusion that we would increase prices post-merger ignores the dynamic and highly competitive nature of the UK grocery market. The CMA is today effectively taking 1 billion pounds out of customers’ pockets.”

Sainsbury’s, Walmart and Asda stated, they have mutually agreed to terminate the transaction, and have opted not to challenge the CMA’s ruling by appealing in courts.

Judith McKenna, Walmart International’s CEO stated she was disappointed in CMA’s analysis. She will now focus on positioning ASDA as “a strong UK retailer delivering for customers. Walmart will ensure Asda has the resources it needs to achieve that”.

According to investors and analysts in the U.S., the deal’s failure marks a setback for Walmart in its drive towards profitability in its overseas operations.

Walmart has focused on turning around its international business by targeting higher growth markets such as India and China while reducing its footprint elsewhere. Case in point: it sold its majority stake in its Brazilian business and acquired a majority stake in Indian e-commerce company Flipkart – its biggest deal in 2018.

According to analysts, CMA’s ruling will be a temporary setback from which Walmart will recover.

“It is a sticking point but not a disaster,” said Laura Kennedy, vice president, retail sales and shopper practice at Kantar Consulting. “They were going to keep share in ASDA and were not completely cutting it loose.”

Mirroring a similar standpoint, Jason Benowitz, fund manager with the Roosevelt Investment Group, stated Walmart can afford to be patient with ASDA.

“This news is an obstacle to maneuver around but hardly a crisis from Bentonville’s perspective,” said Benowitz.

Ramifications

The ramifications of the deal falling apart are likely to be significant. According to some analysts, Sainsbury’s will have to undergo a major shake-up that could see its new Chairman Martin Scicluna leave the company.

As per analysts at Jefferies, the risk of a reinvigorated market leader Tesco continuing to recover customers historically lost to Sainsbury’s needs to be urgently addressed.

With Walmart facing a block in its bid to get out from Britain, analysts opine that Walmart could consider a stock market listing of Asda or even try to sell it to private equity.

In February, as per a report from The Sunday Times, private equity group KKR was mulling an offer for Asda.

Both, the IPO option as well as the private equity options have hurdles.

According to a senior UK supermarket director, “The problem with the idea of private equity is that the only way PE makes money is to have its own exit, and there isn’t one because you can’t break-up Asda now”; “The problem with an IPO is – what growth prospects are you selling? The story to investors is not a very good one”.

He went on to add, Walmart may decide to run Asda as a profit center and simply instruct CEO Roger Burnley to make them more money.

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