UK 'big four' retailer Sainsbury's has confirmed it is to merge with rival Asda in a deal which will make the merged business the UK's largest supermarket group.

U.K. grocer J Sainsbury Plc plans to buy Walmart Inc.’s Asda in a 7.3 billion-pound ($10 billion) deal that would transform the country’s supermarket industry and leave the U.S. retailer as the combined company’s biggest shareholder.

Sainsbury will pay Walmart 2.98 billion pounds in cash and 4.3 billion pounds in stock, the U.K. company said in a statement Monday detailing the terms after confirming a Bloomberg News report on the plan over the weekend. Walmart would get a 42 percent stake in the merged entity, Sainsbury said.

Sainsbury shares rose as much as 21 percent in London. Tesco Plc, the current U.K. grocery market leader, fell as much as 3.4 percent, while Wm Morrison Supermarkets Plc dropped as much as 4.4 percent in early trading, according to www.reuters.com

2.800 stores

Sainsbury's said the merged entity - which will create a network of more than 2,800 Sainsbury's, Asda and Argos stores - will "create a dynamic new player in UK retail with an outstanding range of products, delivered through multiple channels".  

The company added:

"Enhanced scale and a strengthened balance sheet will deliver a great deal for customers, colleagues, suppliers and shareholders of both businesses."

It said both the Sainsbury's and Asda brands will be maintained but said operational efficiencies and investment means it expects to lower prices by as much as 10% on many products!

Sainsbury's suggested the deal will create "significant opportunities" for suppliers to develop differentiated product ranges, become more streamlined and to grow their businesses as the combined business grows.

"A transformational opportunity"

The combined business will be chaired by the Sainsbury's chairman and led by the Sainsbury's CEO and CFO. Asda will continue to be run from Leeds with its own CEO, who will join the group operating board of the merged company.

"This is a transformational opportunity to create a new force in UK retail, which will be more competitive and give customers more of what they want now and in the future. It will create a business that is more dynamic, more adaptable, more resilient and an even bigger contributor to the UK economy», argues Mike Coupe, CEO in Sainsbury's.

"This proposed merger represents a unique and bold opportunity, consistent with our strategy of looking for new ways to drive international growth", says Judith McKenna, president and chief executive officer of Walmart International. 

A supermarket giant 

Sainsbury’s is currently the second largest supermarket group with a 15.8% market share while Asda is in third place at 15.6%. Tesco is currently in first place with a 27.6% market share.

The deal would create a supermarket giant rivaling or surpassing Tesco in market share, with 51 billion pounds in sales, 2,800 stores and 330,000 employees.

Chief Financial Officer Kevin O’Byrne struck an optimistic note in view of potential regulatory hurdles, saying the two businesses are complementary in terms of geography, and that consumers would benefit from lower prices because of the company’s greater scale. Sainsbury said it expects to cut prices of many frequently purchased goods by about 10 percent because of the deal.

“The market has changed dramatically since the last time the regulator looked at this,” the CFO said on Bloomberg television, citing the rise of discounters and online offerings.

500 million pound synergies

Sainsbury said it expects synergies of at least 500 million pounds from the deal and plans no store closures as a result. Sainsbury Chief Executive Officer Mike Coupe will serve as CEO.

The target for savings is “conservative” and buying synergies alone could potentially reach 1 billion pounds, many analysts believe.

Competition probe

Already there are calls for a competition probe, given that the tie-up would result in the merged operators controlling about a third of the grocery market.

Vince Cable, the Liberal Democrat leader and business secretary in the 2010-2015 coalition government, said merging the second and third-biggest players risked “the creation of even more concentrated local monopolies”, writes Financial Times www.ft.com. 

It will not have escaped the attention of Sainsbury’s and Asda that the The Competition and Markets Authority (CMA) approved the recent acquisition of Booker by Tesco without prescribing any remedies.

Analysts are divided over the implications of this.

“I can’t see there being a major issue at the CMA. They have just approved the Booker deal. The number of stores that Sainsbury’s and Asda will have to sell is probably not that significant,” said James Watson, head of retail capital markets at Colliers International, to FT. 

• The enlarged group would be able to better compete against German discounters Aldi and Lidl, both of which have been rapidly growing market share in Britain.
• The deal would generate synergies of at least 500 million pounds, Sainsbury’s said, and enable prices to be lowered by about 10 percent on many products.
• Joining together the UK’s second and third-biggest supermarket chains with combined revenues of 51 billion pounds will reduce costs and increase buying power but could face major regulatory hurdles.
• The deal would see both the Sainsbury’s and the Asda brands maintained, combining a network of over 2,800 stores.
• There are no planned Sainsbury’s or Asda store closings because of the merger.
• The combined business will be chaired by Sainsbury’s Chairman David Tyler and led by Sainsbury’s Chief Executive Mike Coupe.
• Britain’s big four grocers, including No. 4 player Morrisons (MRW.L), are all losing shares to Aldi and Lidl and are also having to deal with growing demand for internet grocery shopping.
• Sainsbury’s and Walmart expect conclusion of the deal in the second half of 2019.

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