Written By Jonathan Eley and Jim Pickard
Walmart to take 42% stake in combined group and £3bn in cash for selling British arm
MPs and analysts have warned of the prospect of thousands of job losses and the closure of scores of supermarkets as Britain’s competition regulator gears up for an extended investigation into J Sainsbury’s plans to take over Asda.
The UK’s second-biggest food retailer announced on Monday that it would take control of the Walmart subsidiary in a deal that would create Britain’s biggest grocer by market share.
US-based Walmart will receive almost £3bn in cash and 42 per cent of the combined business in return for selling Asda, whose equity is valued at £7.3bn under the terms of the agreement announced on Monday. It has agreed to hold no more than 29.9 per cent of the total voting rights in the combined business.
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Shares in Sainsbury’s rose 14.5 per cent to 309p on Monday. But politicians queued up to question the two groups’ commitment to close no stores and for no jobs to be lost.
Hilary Benn, MP for Leeds Central, said the pledge did not mean there would be no redundancies in the Yorkshire city where Asda was based, while Rachel Reeves, another Leeds MP and chair of the business select committee, said staff would be “incredibly concerned” about their future.
Rebecca Long-Bailey, shadow business secretary, said the CMA should examine the potential impact on suppliers “as a matter of urgency” and warned about the prospect of an “emerging monopoly”.
The two groups’ official position is that they do not expect to have to sell or close any stores as a result of the combination. Both brands will be maintained, as will Asda’s headquarters, and price cuts of up to 10 per cent on everyday items have been promised after completion.
The CMA said on Monday it was likely to review the combination and that “pre-notification” talks with the companies could last “a number of weeks” before the start of an initial “Phase 1” investigation.
Analysts were split over the prospect of enforced store disposals. “This deal could easily unravel acrimoniously if the CMA sticks to its old rules and parameters,” said Bruno Monteyne at Bernstein. Patrick O’Brien, research director at GlobalData, said his analysis showed at least 75 stores might need to be sold.
“I would hope they have taken good legal advice,” said one big shareholder in Sainsbury’s. “They clearly think they will get through. You would have thought they [the companies] would have been all over this [competition concern] like a rash.”
Sainsbury’s biggest shareholder, the Qatar Investment Authority, has publicly supported the takeover.
The deal marks an ambitious attempt to reshape the UK retail market, in which the traditional big four retailers — Tesco, Sainsbury’s, Asda and Wm Morrison — have come under pressure from German discount chains Lidl and Aldi in food, and from homegrown rivals along with internet retailers such as Amazon in general merchandise.
Based on their market shares, the combination of Sainsbury’s and Asda would control almost a third of the UK grocery market, putting it ahead of Tesco. The combined business will be chaired by Sainsbury’s chairman David Tyler and led by its chief executive Mike Coupe and chief financial officer Kevin O’Byrne. Asda will continue to be run from Leeds, with its own chief executive.
The transaction also reflects a rethink of UK strategy on the part of Walmart, which bought Asda for £6.7bn in 1999.
“We’ve been clear that we are going to be thoughtful and look at different ways of operating internationally. We no longer always need to be in control,” said Judith McKenna, president and chief executive of Walmart International.
Sainsbury’s brought forward its full-year results announcement from Wednesday. Underlying pre-tax profit for the year to March 10 was £589m, with the total dividend lifted 8 per cent to 10.2p. Profit expectations for 2018-19 were £629m, in line with current consensus forecasts.
It said the integration of Argos, acquired in 2016, was ahead of plan, with 280 Argos stores expected to be open in Sainsbury’s by the end of the current financial year, against a plan of 250. The £160m of expected synergies will be delivered six months early.