Blow to Walmart as regulator warns on Asda-Sainsbury’s tie-up - MarketWatch

Sainsbury’s attempt to merge with Walmart-owned Asda was never going to end well after the retail giants took the U.K. regulator to court before it had even ruled on the tie-up.

On Wednesday, the Competition and Markets Authority got its revenge in a major blow to what would have created Britain’s biggest supermarket chain in a £12 billion ($15.6 billion) merger.

“The CMA has provisionally found extensive competition concerns as part of its in-depth investigation,” the regular said in a statement.

This ruling sent shares of J. Sainsbury PLC SBRY, -16.39% tumbling 15.14%, with the future of the deal hanging in the balance.

The provisional ruling, which has been slammed by some as out of touch with the changing retail landscape, suggests the merger should either be blocked or be conditioned the sale of a significant number of stores, or one of the brands.

Asda, acquired in 1999 by Walmart Inc. WMT, -2.86% , and Sainsbury’s said in a statement: “These findings fundamentally misunderstand how people shop in the U.K. today,” with Sainsbury’s chief executive, Mike Coupe, adding in a radio interview: “[The CMA] have fundamentally moved the goalposts, changed the shape of the ball and chosen a different playing field.”

Britain’s second and third biggest grocers had seen a tie-up as the answer to threats from online giant Amazon Inc. AMZN, +0.29% and smaller rival Ocado Group PLC OCDO, +0.71% OCDDY, +4.29% and discounters Lidl and Aldi.

Grocery retailers have struggled as seismic shifts have swept through the sector in recent years.

Legacy chains face fierce competition from discounters and have been hurt by changing shopping habits.

The High Street used to be dominated by four big players, Tesco, Asda, Sainsbury’s and Wm. Morrisons Supermarkets PLC MRW, -5.25% , and shoppers tended to buy supplies in one main supermarket trip. But the weekly shop has been replaced by shoppers making multiple visits to smaller convenience stores, as customers, in the wake of the financial crisis, seek to save money and create less waste.

Grocers with smaller neighborhood shops, such as the Co-op, have found themselves better placed than many of the legacy chains stuck with their large supermarket footprints and fewer shoppers.

Consolidation was seen as a way of helping these chains cut costs, largely in the back office, making these stores economically viable and keeping prices down.

But the regulator did not see it this way, causing critics to conclude it is stuck with an outdated view of the market.

“Whilst we need to see if Sainsbury and Asda can argue and legally challenge the CMA’s findings, the deal looks to have suffered a mortal blow,” Clive Black, an analyst at broker Shore Capital, wrote in a note.

Saying the ruling removes the merger premium, he downgraded the stock from hold to sell.

Sainsbury’s and Asda will further argue in defense of the deal that there has also been a big shift towards shoppers buying their groceries online.

This is an area where Amazon AMZN, +0.29% is trying to gain scale, and Ocado, which has no stores, is a strong player. These are both rivals with scale that Sainsbury’s and Asda can argue represents healthy competition. The pair have also suffered from shoppers heading to no-frills chains Aldi and Lidl, which offer less selection but cheaper products.

The duo will try to argue this more fragmented market shows the dominance of legacy players is waning.

The big four grocers now control just over two-thirds of the grocery market, according to market research firm Kantar.

In its statement, the CMA said it is concerned the Asda-Sainsbury’s tie-up could lead to weakening competition, driving prices higher, hurting the shopping experience and causing a reduction in the range and quality of products offered. And some commentators have said the ruling is good for consumers.

Relations between the Sainsbury’s and Asda and the CMA have not been helped after a court ruled the CMA had acted unfairly in not allowing the grocers more time to respond to evidence submitted as part of this investigation.

The CMA process is now going through a consultation process and Sainsbury’s has vowed to fight on with its merger which would have seen it retain both brands benefiting from purchasing savings.

The tie-up, which was agreed in April last year, would have seen the combo overtake Tesco TSCO, +0.66% TSCDY, +0.90% as Britain’s largest retailer, with revenue of about £51 billion and more than 2,800 stores in possession of 31.2% of the market.

Walmart was set to receive £3 billion and take a 42% stake in the combined business. The U.S. retail behemoth had the option of selling down to 29.9% after two years and exiting completely after four.

The regulator’s ruling leaves Walmart with a problem in the U.K.: Asda has struggled in recent years, although it posted its seventh consecutive quarter of sales growth on Tuesday, up 1% over the past three months.

It comes as Walmart reported fourth-quarter results on Tuesday that beat analysts’ consensus forecasts.

Read: Walmart isn’t seeing the consumer downturn that the December retail sales collapse suggested

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