UK giants in $27.2 billion merger talks

Sainsbury's LocalBritish supermarket giants Asda and Sainsbury’s are expected to reveal the details of a £15 billion (AUD$27.2bn) merger that would see rival Tesco dethroned as the largest grocer in the UK.

The deal has reportedly been in the works for some time and was revealed by UK press over the weekend, with Sainsbury’s confirming talks and promising more details on the proposal when the London Stock Exchange opens on Monday.

Sainsbury’s and Walmart owned Asda are already two of the largest retail groups in the UK and if merged would command a significant share of the food, clothing and household goods markets.

A deal would require approval from the UK’s competition watchdog, the Competition and Markets Authority, which approved Tesco’s £3.7 billion takeover of wholesaler Booker last year.

Should Sainsbury’s network of more than 1,400 stores be merged with Asda’s 600 or so locations the combined businesses would command 31.4 per cent of the UK’s grocery market, according to Kantar World Panel data.

That would trump Tesco’s 27.6 per cent share of the market, resulting in the largest shake-up to the UK supermarket sector since the acquisition of Safeway by Morrison in 2004.

GlobalData estimates that the merged entity would have a 22 per cent share of the combined food and grocery market, again exceeding Tesco’s 22 per cent share.

Global data managing director Neil Saunders said the move was indicative of the intensity of competition in the UK’s grocery markets as discounters like Aldi and Lidl increasingly weigh on established players.

“The deal is also genuinely additive in that Sainsbury’s and Asda have different market positions both geographically and in terms of the demographics they serve. There is some overlap, but it is far more minimal than that between, say, Sainsbury’s and Tesco,” he said.

Sainsbury’s also owns clothing business Argos, which could generate synergies with Asda’s George Clothing brand, which already has relationships with several UK department stores.

A merger is expected to draw considerable scrutiny from the competition watchdog though, as the regulator has previously baulked at consolidating the UK’s top four supermarkets into three.

“Given the highly consolidated market, it is likely that scrutiny would be high and an investigation prolonged. Furthermore, we believe that even if a deal was ultimately permitted, it may be subject to remedies such as store disposals and other measures which would be disruptive,” Saunders said.

More to come.

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