Sainsbury's flagship store

LONDON — British supermarket giants Sainsbury’s and Walmart-owned Asda are aiming to create Britain’s largest grocer in a merger that will see both brands remain intact and the businesses run as one with combined revenues of more than 50 billion pounds.

The retailers confirmed their plans Monday after revealing over the weekend that they were in advanced discussions. The deal values Asda at about 7.3 billion pounds, on a debt-free, cash-free and pension-free basis, and will see Walmart become a 42 percent shareholder in the new, combined business.

“The retail sector is going through significant and rapid change, as customer shopping habits continue to evolve,” Sainsbury’s and Asda said Monday. “This has led to increased competition across grocery, general merchandise and clothing, as customers seek ever greater value, choice and convenience. Bringing Sainsbury’s and Asda together will result in a more competitive and more resilient business that will be better able to invest in price, quality, range and the technology to create more flexible ways for customers to shop.”

Both stores touted the creation of “a dynamic new player” in U.K. retail and said that, once joined, they expect to lower prices by about 10 percent on many of the products that customers regularly buy.

It’s now up to the U.K.’s Competition and Markets Authority to give the green light, although that will most likely involve some closures of the retailers’ combined 2,800-strong-store estate. Walmart said the conditions to complete the transaction, including regulatory approval, could extend into the second half of 2019.

The competition authorities will also be looking closely at future market share: Over the last 52 weeks, Tesco’s slice was 27.9 percent, while Sainsbury’s was 16 percent. Asda held 15.4 percent and Morrison’s 10.5 percent, according to Barclays. Discounters Aldi and Lidl have grabbed nearly 30 percent. The bank said the Sainsbury’s/Asda entity would dominate 31.4 percent were the merger to be successful.

Financial markets welcomed the move, with shares in Sainsbury’s shooting up nearly 20 percent to 3.23 pounds following the announcement. The shares closed up 16.8 percent at 3.15 pounds.

Industry observers said the tie-up should benefit everyone — with the exception of producers, suppliers and supermarket staff. Given the inevitability of store closures and the combining of back-office operations, layoffs are on the cards.

“There are certainly good reasons for considering this merger,” Barclays wrote in a report following the announcement. “Buying synergies, cost savings, additional Argos synergies, complementary strengths and weaknesses. But there are also risks: A competition investigation could take a year or more and significant store divestments might be needed. Running dual (brand) banners would make it harder to extract the full synergy potential.”

There is no doubt the climate is brutal for British grocers, with Amazon muscling in via Amazon Fresh and its takeover last year of Whole Foods. The biggest squeeze, however, has come from the German discounters Aldi and Lidl; the impact of Brexit and the weaker pound on sourcing, and changing consumer habits.

Shoppers are shunning jumbo stores on the edges of town, preferring to do their weekly shop online instead. They’re also gravitating toward smaller-format, city-center stores, which Tesco, Sainsbury’s, Waitrose, Aldi and Lidl are scrambling to build. Aldi and Lidl have each favored medium-sized stores in suburban areas and on high streets in less affluent neighborhoods.

Shopping dynamics have changed since Walmart bought Asda in 1999, looking to dominate the U.K. market with its superstores.

“Customers are looking for super-convenience shopping, which means that they want a network of well-stocked local stores, as well as a better online experience,” said Sanjay Bailur, managing director of AlixPartners in London.

“While consumers may benefit (from the merger), it will spark even more intense price competition across multiple sectors including grocery, convenience and general merchandise. The massive increase in sourcing scale will result in even more pressures on food producers and manufacturers who will need to find new ways of staying viable.”

The two retailers said they plan to leverage all Sainsbury’s, Asda and Argos catalogue stores (owned by Sainsbury’s since 2016) to provide greater choice for customers across multiple product categories.

Sainsbury’s Tu and Asda’s George apparel ranges will remain intact, with the retailers planning to cross-fertilize the distribution. George is the second-largest apparel brand in the U.K. by volume while Tu is ranked at number six. Both brands offer apparel for men, women, and children as well as school uniforms, shoes, lingerie and infant wear.

Asked about the future of George post-merger, an Asda spokesman said: “Both George and Tu will continue. There will be no changes. There is only opportunity. Imagine selling George through Argos and Sainsbury’s, and selling Tu at Asda. This is a merger of two organizations. The brands will remain separate — it’s all about the opportunities.”

The new, combined business will be chaired by Sainsbury’s chairman David Tyler and led by Sainsbury’s chief executive officer Mike Coupe and the store’s chief financial officer.

Asda will continue to be run from Leeds with its own ceo, Roger Burnley, who will join the group operating board of the combined business.

Judith McKenna, president and ceo of Walmart International, said the proposed merger represents “a unique and bold opportunity, consistent with our strategy of looking for new ways to drive international growth.”

She said the combined companies will create “a dynamic new retail player better positioned for even more success in a fast-changing and competitive U.K. market. It will unlock value for both customers and shareholders.”

Sainsbury’s Coupe called the merger “a transformational opportunity to create a new force in U.K. retail, which will be more competitive. Having worked at Asda before Sainsbury’s, I understand the culture and the businesses well and believe they are the best possible fit.”

As part of the deal, Walmart will hold 42 percent of the issued share capital of the new entity and receive 2.98 billion pounds in cash. Walmart will not hold more than 29.9 percent of the total voting rights in the new business.

The merger also solves a headache for Walmart, whose priority now is to compete with Amazon. Asda, with its lackluster sales, was an increasing distraction for the American retail titan.

Asda was also one of the biggest supermarket chains to suffer at the hands of Aldi and Lidl, both of which have been undercutting it on price. “Save money, live better” has long been Asda’s motto, but it has struggled to fulfil that promise to customers — and turn a healthy profit. It has witnessed 11 consecutive quarters of falling sales, although it began to recover and show some growth late last year.

Charlie O’Shea, Moody’s lead retail analyst, said the merger made sense in that context.

“Walmart’s announcement that it is selling a majority stake in Asda, if completed along the terms publicly announced, will be credit positive for the company, as it will provide it with the ability to redeploy assets to avenues with more fertile opportunity for growth,” he said.

“Given the competitive landscape in U.K. grocery retail, profitable growth and expansion opportunities are limited, so reducing resources makes sense, especially when there are other geographies and channels with greater ‘runway’,” O’Shea added.

According to Bill Dreher, analyst at Susquehanna International Group, would agree.

“This move reflects ceo Doug McMillion’s commitment to rationalizing Walmart’s asset base and focus on higher growth and higher return opportunities, allowing Walmart to expand into much higher growth markets of China and India, and away from the extremely competitive and slow growth U.K. market where it has not been able to recreate the success that it had in the U.S.”

Dreher noted that the acquisition did provide Walmart with some lessons learned, and that “executives maintained from Asda” will benefit Walmart going forward. Those executives that have already been promoted to other “global mobile” roles include Judith McKenna, recently promoted to head of Walmart international. She had served as Asda’s chief financial officer and chief operating officer until 2013.

The analyst noted that Walmart’s management said last year the company would be focusing on its key markets, which include the U.S., China, Mexico and Canada. Earlier this year, the company disclosed that it would scale back the size of Sam’s Club to focus on the core Walmart business. Further, there have been reports that the discounter is in talks to sell its Brazil operation to private equity firms. All that makes the decision to sell Asda “consistent” and “makes tremendous strategic sense to us,” Dreher said.

With the possibility that Walmart could be in the final stages of talks for Flipkart, Dreher said focusing on market such as China and India would allow Walmart to “achieve scale before other large competitors can fully enter or gain a competitive advantage.”

He also noted that while Asda has been used to testing new technology in the past, that is no longer needed given the “testing going on in the U.S. And the step up in technology implementation throughout the country.” He added that there now appears to be limited opportunities for additional learning about online grocery that hasn’t already been tested or rolled out in the U.S. by Walmart.

Craig Johnson, president of research firm Customer Growth Partners, said the transaction reduces Walmart’s “old retail” exposure so it can invest in higher-return lean assets. The discounter, he said, is repositioning itself as a nimble, lean powerhouse that is investing more in software and logistics than in new stores, which Johnson dovetails into a more direct-to-consumer technology-enabled future.

Johnson also noted that the sale of Asda is a huge one and McKenna’s “first major move on the global stage.”

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