Sainsbury’s Share Price Suffers As Asda Merger Bid Struggles

Between last March and August the Sainsbury’s share price soared by almost 50% on the back of plans for a mega-merger with Walmart’s Asda. Approximately a year later and it’s fallen back below where it began its 2018 ascent as the chances of the merger going ahead become increasingly doubtful. The move, one that many investors clearly see as crucial to the supermarket’s future prospects in a hugely competitive market is not yet dead but certainly floundering.

Sainsbury’s attempts to drag the merger over the line are looking increasingly desperate. The latest attempt to convince regulators to approve the tie-up is the promise of £1 billion worth of cuts to the prices of products, to the benefit of UK shoppers. £300 million of price reductions have been promised over the first year of the proposed merger with another £700 million introduced over the following tw. The end result would be an approximately 10% discount on the cost of many of the everyday groceries sold by the new combined entity.

A further sweetener for the regulator, the Competition and Markets Authority, is a promise to cap profit margins on sales of petrol and diesel at 3.5p a litre.

Were the merger to go ahead it would lead to the creation of the largest supermarket chain in the UK, dwarfing Tesco. Sainsbury’s and Asda have already been told the merged company would have to commit to the closure of hundreds of stores to gain approval. The requirement is designed to maintain reasonable levels of competition in areas where either an Asda or Sainsbury’s supermarket are the main choices for consumers. However, if the required closures run too deep, it will neutralise the attraction to Sainsbury’s of the deal going ahead.

Sainsbury’s argues that a bigger market share will allow it to drop prices, benefiting consumers. Mike Coupe and Roger Burnley, respectively the top executives at Sainsbury’s and Asda, released a joint statement arguing their case:

"We are trying to bring our businesses together so that we can help millions of customers make significant savings on their shopping and their fuel costs, two of their biggest regular outgoings."

The Competition and Markets Authority is due to give its response to ‘provisional findings’ on the viability of the merger. Its final report is due at the end of April. Those investing online into ISAs and SIPPs holding shares in Sainsbury’s will be desperately hoping for some good news to breathe life back into the merger, which would be almost certain to lead to a significant rebound in share price.