Walmart’s deal to sell Asda to Sainsbury’s in peril

Walmart’s $10 billion agreement to sell its Asda Group Ltd. grocery chain in the United Kingdom to J Sainsbury plc has hit a big roadblock.

The U.K.’s Competition and Markets Authority (CMA) said Wednesday that it has found “extensive competition concerns” with the proposed Asda-Sainsbury’s merger. To address these issues, CMA recommended that the deal be blocked or that the merger partners be required to divest a large number of stores or either the Asda or Sainsbury’s brand.

In announcing the transaction last April, Walmart and Sainsbury’s said the Asda-Sainsbury’s combination would lead to lower prices, improved product selection and quality, and more shopping convenience for U.K. consumers. Yet the CMA’s investigation, launched in mid-May and now in its second phase, counters those purported benefits of a merged Asda and Sainsbury’s.

“These are two of the biggest supermarkets in the U.K., with millions of people purchasing their products and services every day,” Stuart McIntosh, chairman of the CMA inquiry group conducting the investigation, said in a statement. “We have provisionally found that, should the two merge, shoppers could face higher prices, reduced quality and choice, and a poorer overall shopping experience across the U.K. We also have concerns that prices could rise at a large number of their petrol stations.”

Related:Walmart to sell Asda subsidiary to Sainsbury’s

Under the merger agreement, Walmart would hold 42% of the combined company, which would retain the Sainsburys and Asda brands and become the U.K.’s biggest supermarket retailer, surpassing Tesco plc.

The merged entity would have a network of more than 2,800 Sainsbury’s, Asda and Argos stores — including supercenters, superstores, supermarkets and convenience stores — plus some of the U.K.’s most-visited retail websites, for a total of 47 million weekly customer transactions. At the time of the merger announcement, Sainsbury’s said the combined company’s scale would enable it to lower prices by 10% on many products that customers buy regularly.

Sainsbury’s and Asda blasted the CMA’s provisional findings as out of touch with the current retail grocery market and consumers.

“These findings fundamentally misunderstand how people shop in the U.K. today and the intensity of competition in the grocery market. The CMA has moved the goalposts, and its analysis is inconsistent with comparable cases,” Sainbury’s and Asda said in a joint statement. “Combining Sainsbury’s and Asda would create significant cost savings, which would allow us to lower prices. Despite the savings being independently reviewed by two separate industry specialists, the CMA has chosen to discount them as benefits.”

The CMA said a combined Asda-Sainsbury’s “could lead to a substantial lessening of competition at both a national and local level,” especially in areas where the chains’ stores overlap. The agency also expressed concerns that the merger could hike prices and reduce the quality of service for online customers and inflate costs at more than 100 locations where Sainsbury’s and Asda fuel stations overlap.

Recommended options to address such concerns — nixing the deal, selling off a significant number of stores or shedding one of the retail banners — would “recreate the competitive rivalry lost through the merger,” the CMA said. Still, the agency acknowledged that “it is likely to be difficult for the companies to address the concerns it has identified.”

“These are our provisional findings, however, and the companies and others now have the opportunity to respond to the analysis we’ve set out today,” McIntosh commented. “It’s our responsibility to carry out a thorough assessment of the deal to make sure that the sector remains competitive and shoppers don’t lose out.”

The CMA plans to issue its final report on the merger by April 30, following a period of public comment and notice of possible competitive remedies running through early March.

“We are surprised that the CMA would choose to reject the opportunity to put money directly into customers’ pockets, particularly at this time of economic uncertainty,” Sainsbury’s and Asda stated. “We will be working to understand the rationale behind these findings and will continue to press our case in the coming weeks.”

Walmart acquired Asda in 1999 for $10.8 billion. In recent years, U.K. grocery retailers have been engaged in aggressive price wars that have pared their margins. The entry of German hard-discount grocers Aldi and Lidl has further intensified competition, turning up the heat on the value strategy driven by Asda under Walmart.