Sainsbury's and Asda close to United Kingdom retail merger

Sainsbury's and Asda

Sainsbury's and Asda are in advanced talks over a merger which would create a new supermarket giant.

Sky News reports that it is still unclear how a deal would be structured, including whether Wal-Mart would reverse Asda into Sainsbury's while taking a big stake in the combined group.

Asda, which Walmart bought in 1999 for 6.7 billion pounds, is one of the retail giant's largest and worst-performing global businesses.

If the merger goes ahead between Sainbury's and Asda -Britain's second and third largest supermarket chains - the combined group would comprise 2,800 stores and would represent about 30 per cent of the United Kingdom grocery market, similar to Tesco's share.

Britain's big grocers, including No. 4 player Morrisons, have been losing share to German discounters Aldi and Lidl and must also deal with growing demand for internet grocery shopping and the march of Amazon.

What the merger of the second- and third-biggest supermarkets threatens is the creation of even more concentrated local monopolies, so it is obvious that there must be an investigation by the Competition and Markets Authority, starting immediately.

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UBS believes sales at household goods subsidiary Argos were dragged down in the final three months of Sainsbury's financial year as it was impacted by stock clearances at collapsed electronics rivals Maplin and Toys R Us. Analysts reckon Asda was hurt the most by the rise of the discounters, which eroded its traditional price advantage. "This (deal) provides a potential solution for Walmart to deliver a more profitable Asda in the long run", said Shore Capital analyst Clive Black.

Walmart seems to be ready to downsize its United Kingdom operations.

The leadership of ‎a combined Asda and Sainsbury's would be an intriguing detail of a deal, with former Sainsbury's director Roger Burnley recently being promoted to become chief executive of the Wal-Mart-owned chain. Together they would have a share of 31.4 per cent, putting them ahead of current market leader Tesco which has a share of 27.6 per cent.

One proponent of the tie-up suggested that the CMA's decision to wave through Tesco's recent £3.7bn takeover of Booker, the wholesaler, had ‎given a green light for others to explore industry-reshaping mergers.

Sainsbury previously bought catalogue retailer Argos and furniture merchant Habitat in 2016.

A major uncertainty surrounding any combination would be whether the move secures approval from Britain's competition regulator, the Competition and Markets Authority (CMA), given that the deal would effectively create a duopoly.

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