The Competition and Markets Authority (CMA) has found "extensive competition concerns" as part of its in-depth investigation of the proposed merger between Sainsbury’s (SBRY) and Asda. The regulator thinks the proposed deal could lead to a "worse experience for in-store and online shoppers" due to "higher prices, a poorer shopping experience, and reductions in the range and quality of products offered".
Chief executive of consultancy group Retail Economics, Richard Lim, described the findings as a "hammer blow" to the potential tie-up – evidenced further by the sharp fall in Sainsbury’s shares the day the news emerged. Mr Lim added that any recommendations made by the regulator in the final stage of the review "may be too much to swallow" to allow the deal to pass.
The CMA admits that blocking the deal is one way to address the concerns raised, but telling the merging companies to sell off "a significant number of stores and other assets" in an attempt "to recreate the competitive rivalry lost through the merger" could offer another course of action. Brokerage Shore Capital is not convinced. Analysts there believe the CMA "has done its job" and "seemingly rejected" the merger, although it remains to be seen whether Sainsbury’s and Asda will mount a legal challenge to the findings.
This is not wholly unlikely. In response, Sainsbury’s said it "fundamentally disagreed" with the issues raised by the CMA, claiming the regulator had "moved the goalposts" and that its analysis was "inconsistent with comparable cases". It claims a merger would produce significant cost savings that would allow it to lower prices, adding it was "surprised" the CMA would "choose to reject the opportunity to put money directly into customers' pockets, particularly at this time of economic uncertainty".
But Shore Capital called the company’s statement "laughable", claiming that Sainsbury’s had "misunderstood the consumer and the CMA". Analysts downgraded their view on Sainsbury’s shares from 'hold' to 'sell', as the CMA statement effectively removes the merger premium.
