Edoardo Pisciotta London - 1/05/2018
With a deal that was long in the making, ASDA and Sainsbury announced a merger last Saturday, with the latter effectively acquiring the former. Walmart (the US retailer giant that controls ASDA) will lose control of its UK subsidiary but will retain 42% of the new company and £3 Billion in cash in a deal that values ASDA at £ 7.3 Billion. The deal was long sought by Sainsbury in an attempt to consolidate its position in the UK retail market following the acquisition of catalogue retailer Argos in 2016.
The UK grocery market has 8 big players dominating the scene together with small companies which occupy niche positions. The big chains have seen their market share eroded by competition from discounter chains (like Aldi and Lidl), with the sector becoming brutally competitive.
The UK supermarket sector is brutally competitive
The new combined company will have a 30% share of the UK grocery market, surpassing the traditional leader Tesco. However, analysts agree that the move is directed at fending off the threat from German discount chains Lidl and Aldi and e-commerce giant Amazon. Investors applauded the news and the Sainsbury stock gained 18% on Monday.
Sainsbury was quick to announce that the merger would be beneficial for consumers as it would allow the new entity to offer cheaper prices. This is the latest of a series of acquisitions that is described as beneficial for customers, despite creating an oligopoly. It seems that, paradoxically, acquiring a large competitor increases the competitivity of the market rather than reducing it. A bigger company with an increased scale allows larger volumes reducing costs, with savings that can then be passed to consumers.
It is likely that suppliers will see their margins eroded
Sainsbury and Asda have announced that no shop will close as a result of the merger as a large geographic footprint is key in the strategy of the new company. While the final decision rests with the Competition and Market Authority, MPs are worried about the potential job losses that the merger could bring to their communities. However, it is likely that the new Sainsbury-ASDA will close as few shops as possible.
Cost-savings measure will be achieved from renegotiating deals with suppliers. In this scenario local and regional companies who supply the new Sainsbury-Asda would be squeezed by lower prices for larger volumes. Rebecca Long-Bailey, shadow business secretary, has called for the CMA to examine the impact of the merger on suppliers and warned against the possible emergence of a monopoly.
What do small and medium business owners think of this deal and of the British M&A frenzy?