What happens next with ‘Sasda’?

Published on: 25th February 2019

Speculation grows about the fate of Sainsbury’s and Asda in the wake of the CMA’s merger findings, with KKR and Amazon linked to potential deals.

Media reports have concluded that the Sainsbury’s Asda merger was dealt a fatal blow by last week’s Competition & Market Authority report into the deal. With its recommendation that at least 300 stores would need to be sold to a single buyer for the merger to be approved, along with the possible disposal of either the Sainsbury’s or Asda name, the CMA appears to have set conditions which make the deal unlikely to proceed.

Observers are now positing alternative scenarios for the two retailers. The Sunday Times reported that American private equity giant KKR is planning a bid for Asda. The story suggested that KKR – one of the private equity companies which owned a portion of Toys R Us up until its bankruptcy last year- is working on a bid with former Asda executive Tony De Nunzio, who would allegedly become chairman if a deal was to be struck. The Sainsbury’s deal valued Asda at £7.3bn, but the retailer would be expected to have a lower valuation in a stand-alone sale because the economies of scale would no longer apply. If a deal with KKR goes ahead, it would represent the first time one of the big four UK supermarkets would be under private equity ownership. However, any deal would likely see Walmart retain a significant minority holding, in order to keep the purchase price down, as well as allowing the operation to continue to benefit from Walmart’s buying power.

Asda has been a lucrative investment for Walmart, which has taken out billions in dividends and taken many of its key executives over to fill top roles in the States. A source is reported to have said that Walmart is “not in a rush” to find a new buyer for Asda, although a former executive is quoted as saying: “Walmart will have to be clear about whether they are going to sell it – it’s bad for morale.”

Meanwhile, the failure of the deal has also left Sainsbury’s vulnerable to a takeover approach, after its share price fell by 17% on the day the CMA report emerged. The current share price values the business at £5.2bn: before its £1.4bn takeover of Argos, it was worth £7.1bn. Adjusted for lease obligations, Sainsbury’s net debt is 3.6 times underlying earnings – more than twice the level of Tesco or Morrisons. Also, the retailer needs to refinance £650m of debt this year, which may lead Sainsbury’s to approach shareholders for a cash injection.

An alternative theory is that Amazon may be watching the situation closely: a move for Sainsbury’s would provide the online giant with a ready-made estate of stores for an affordable price. Amazon had previously been linked with a move for the stores that Asda and Sainsbury’s would be required to sell as part of the merger deal, so the acquisition of Sainsbury’s as an entity certainly shouldn’t be discounted.


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