New UK supermarket giant: Asda-Sainsbury’s “pivotal” merger fuels fears of a supplier squeeze

However, Sainsbury’s has confirmed that there could be price cuts of around 10 percent on some of the products customers buy regularly and insists “there are no planned Sainsbury's or Asda store closures as a result of the combination.”

Sainsbury's and Walmart Inc have agreed on terms of a proposed combination to create an enlarged business which, if approved by regulators, will surpass Tesco, currently the UK’s largest retailer.

Both companies stress their “shared set of values” and pledge the combined business will be a major contributor to the UK economy.Click to Enlarge

The big UK retailers have been facing pressure from discounters like Aldi and Lidl for some time, and at the same time, online grocery shopping is growing in popularity as more consumers use convenient e-commerce services through apps like Amazon Fresh, that deliver groceries.

What about suppliers?
Sainsbury’s has stated that the breadth of products the tie-up would deliver, the enhanced scale and a strengthened balance sheet will deliver a great deal for customers, colleagues, suppliers and shareholders of both businesses.

For suppliers, there is great opportunity to grow and more streamlined supply chains mean more efficiency and, according to both Sainsbury’s and Asda, the combination will protect the choice for customers in the future.

The merger plans come at a time when the UK retail sector continues to go through significant and rapid change, as customer shopping habits continue to evolve. This has led to increased competition across grocery, general merchandise and clothing, as customers seek ever greater value, choice and convenience, according to Sainsbury’s.

Bringing Sainsbury's and Asda together will result in a more competitive and more resilient business that will be better able to invest in price, quality, range and the technology to create more flexible ways for customers to shop, says Sainsbury’s.

The combination will result in Walmart holding 42 percent of the issued share capital of the Combined Business and receiving £2.975 billion of cash (subject to customary completion adjustments), valuing Asda at approximately £7.3 billion on a debt-free, cash-free and pension-free basis.

At the time of completion of the combination, Walmart will not hold more than 29.9 percent of the total voting rights in the Combined Business.

The combination will:
- Create one of the UK’s leading grocery, general merchandise and clothing retail groups, with combined revenues of c.£51 billion for 2017.
- Maintain both the Sainsbury's and Asda brands and enable them to sharpen their distinctive customer propositions and attract new customers.
- Combine a complementary network of more than 2,800 Sainsbury's, Asda and Argos stores and several of the UK’s most visited retail websites, to create greater choice for customers through more store formats and channels, with a combined 47 million customer transactions per week.
- Enable investment in areas that will benefit customers the most: price, quality, range and creating more flexible ways to shop in stores and through digital channels, across Sainsbury's, Asda and Argos.
- Expect to lower prices by c.10 percent on many of the products customers buy regularly.
- Generate net EBITDA synergies, post investments in price, across the enlarged group of at least £500 million. These synergies are comprised largely of buying benefits, opening Argos in Asda stores and operational efficiencies. There are no planned Sainsbury's or Asda store closures as a result of the combination.
- Deliver benefits to the Combined Business through a close relationship with Walmart, both as a strategic partner and long-term shareholder, allowing the business to share knowledge and technology developments between Walmart, Sainsbury's and Asda.
- Offer more opportunities for over 330,000 colleagues at all levels within the enlarged group, drawing on the shared values and heritage of both businesses.
- Create significant opportunities for suppliers to develop differentiated product ranges, become more streamlined and to grow their businesses as the Combined Business grows.
- Deliver substantial value creation for shareholders of Sainsbury's, through double-digit EPS accretion and low double-digit ROIC by the second full financial year post-completion.
- Reduce Sainsbury’s lease-adjusted leverage, benefiting from Asda’s high freehold property ownership and pension-free balance sheet, protecting the interests of hundreds of thousands of Sainsbury's and Asda pension holders.
- Be highly cash generative, enabling a faster de-leveraging profile. The Combined Business is expected to have an investment grade credit profile on completion.

A pivotal deal
During a conference call hosted by Sainsbury's earlier today, the company described the tie-up as “a pivotal announcement about the future of our business and our industry.”

“We believe we will generate considerably more value for our shareholders in the future by pursuing this opportunity and believe this combination will deliver benefits for every stakeholder,” said Roger Burnley, CEO of Asda.

“The combination of Asda and Sainsbury's into a single retailing group will be great news for Asda customers, allowing us to deliver even lower prices in store and even greater choice. Asda will continue to be Asda, but by coming together with Sainsbury's, supported by Walmart, we can further accelerate our existing strategy and make our offer even more compelling and competitive.”

“From my six years with Asda and ten years with Sainsbury's, I know first-hand that both organizations are fortunate to employ some of the most talented and customer-focused colleagues in this market and I am excited by the opportunity of the two coming together,” he adds. 

 

Mike Coupe, Chief Executive Officer of Sainsbury's, said that the deal is expected to be fast-tracked to the Competition and Markets Authority (CMA) review and is anticipated to be completed in second half of 2019.

“Why this transaction is right and right for now; the world is changing very rapidly and customers have more choice than ever. The rise of digital technology has amplified that and competitors that didn’t even exist ten years are covertly looking at the markets that we operate in.”

“If you don’t adapt fast that will lead to businesses going out of business. It will create a more adaptable business for customers it will result in more flexible ways to shop and will be a UK listed PLC and good for the British economy.”

“For suppliers, it will offer greater efficiency and through the combined entity, the opportunity to grow into the future.”

“We will have 25-26 percent of the grocery market and will become a much bigger player in clothes and general merchandise.”

What about Brexit?
Of course the announcement comes just months before the UK officially leaves the European Union and although there is nothing in the official statement that mentions Brexit specifically, Sainsbury’s and Asda were both keen to stress how the new combined business would be a massive contributor to the UK economy and one of the top taxpayers in Britain – even saying that the merger will lower the cost of living for UK consumers.

During the conference call Judith McKenna, President and Chief Executive Officer of Walmart International, said: “Walmart has been transforming itself, leaning into digital and online and omni-channels and equally has been much more open to new partnerships.”

“This is a unique opportunity to create a vibrant and resilient UK business, a PLC,  a combined business that will lower the cost of living for customers.”

“Walmart can maintain an active share in the UK market and what’s important is that we think about this in the long-term – it's about the share value that we can unlock in the long-term. This is probably the boldest move that we’ve made so far.”

“It’s incredibly important to us to not just be about the here and value. This for us creates a dynamic new player in the market. Business will be stronger and healthier and more reliant for the future, and one of the things we bring to the party is our global expertise.”

What about the regulators?
The tie-up – which would comprise 2,800 stores and would represent 31.4 percent of the UK grocery market – will face heavy scrutiny from regulators and the CMA is expected to investigate.

Some UK politicians, including Liberal Democrat leader Sir Vince Cable, a former business secretary, are already calling on the competition watchdog to heavily scrutinize the deal and Cable is concerned the move will create “even more concentrated monopolies.”