Sainsbury’s plan to buy Walmart Inc.’s Asda was welcomed by investors and frowned upon by short sellers, causing the shares to rise the most on record. Some analysts cautioned that a tie-up will almost certainly see a high level of scrutiny from the U.K.’s Competition and Markets Authority (CMA). This could result in harsh conditions for approval and a number of store divestments.
Sainsbury shares gained as much as 21 percent after announcing the 7.3 billion-pound ($10 billion) deal that would leave Walmart as the combined company’s biggest shareholder. U.K. rivals Tesco Plc and Wm Morrison Supermarkets Plc and some grocery suppliers fell. Shares of Dixons Carphone Plc, which competes with Sainsbury’s Argos brand in electrical and home goods, also declined.
Here’s a roundup of what analysts are saying about the deal.
Berenberg, Dusan Milosavljevic
(Rates Sainsbury buy)
Sees news as positive as it confirmed that Walmart will be the main shareholder in the combined entity; with Walmart and Qatar Investment Authority holding more than 50%, the “minority equity share becomes significantly derisked”, which supports a possible re-rating.
Sees guided synergies of GBP500 million as conservative.
Also notes that Sainsbury delivered strong set of results with a 2H pretax profit beat of a ~6% and deleveraging progressing better than guided.
Jefferies, James Grzinic
(Rates Sainsbury hold)
A Sainsbury’s takeover of Asda “would represent a remarkable step-up in U.K. industry consolidation, if cleared.” Estimates that the deal would be approximately 40% accretive to mid-term Sainsbury estimates.
Says the willingness of the two groups to pursue a combination despite the “significant risk” of the deal being blocked on competition grounds suggests that Sainsbury “feels very vulnerable in a post Tesco/Booker world,” that Walmart wants to exit the U.K., and that Sainsbury/Asda are willing to accept what could be punishing conditions to gain approval.
Most aggressive response Morrison could make would be to make a bid for Sainsbury itself.
HSBC, David McCarthy
(Upgrades Sainsbury to hold from reduce)
Expects the proposed combination to be given a full referral to the CMA and for the process to take a year. A key consideration will be that the “Big 4 would become a Big 3,” and says that the CMA will likely be focused on a lack of consumer choice at a local level.
Says that “while the standalone investment case remains challenged, the shares are likely to track sideways while the market digests the implications of this potential combination.”
Bernstein, Bruno Monteyne
Move is “a bold gamble” which could easily unravel acrimoniously if the CMA sticks to its old rules and parameters.
Says “everything swings on CMA store disposals” and notes that at 13% store disposals, the deal would stop being accretive.
Expects process for CMA to take a year and to be swiftly approved, if the CMA gives clearance with limited disposals; says “risk of higher disposals is high and a non-negligible risk of outright rejection of the deal.”
Shore Capital, Clive Black
(Downgrades Sainsbury to hold from buy)
CMA’s unconditional clearance of the Tesco/Booker merger “was a master stroke in self-perpetuation,” lifting a lid that has been in place since the acquisition of Safeway by Morrisons on the organizational composition of the U.K. supermarket scene and “so guaranteeing the regulator future work.”
With what appears to be a new unofficial competition policy in place, this has encouraged the U.K.’s number two and three supermarket groups to propose a merger.
Peel Hunt, Jonathan Pritchard
Says it is not the “most obvious combination in the world.” Adds that the CMA will have plenty to look at, which could result in dozens of store divestments, but irrespective of this the combined group will be a powerful unit.
NOTE: Some analyst notes may have been published prior to this morning’s confirmation of the deal.
NOTE: Sainsbury short interest is about 14% of shares outstanding, according to Markit data.
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