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Sainsbury - shares fall as CMA dashes merger hopes

George Salmon | 20 February 2019 | A A A
Sainsbury - shares fall as CMA dashes merger hopes

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Sainsbury (J) plc Ordinary 28,4/7p

Sell: 190.50 | Buy: 190.70 | Change -1.90 (-0.99%)
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The Competition and Markets Authority (CMA), has raised extensive competition concerns around the proposed merger of Sainsbury and Asda.

The CMA said the merger - which would create the UK's largest food retailer - would lead to a 'poorer shopping experience' for customers. Sainsbury has until 13 March to respond to the findings, with the CMA's final report due on 30 April.

Shares fell 12% on the news.

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Our view

The Competition and Markets Authority's (CMA) hasn't rejected the deal outright. But its suggested compromises, like selling one of the brands, or getting rid of a large chunk of the merged estate, would be hard to swallow.

A lot of hope was pinned on this deal going ahead. But, barring a major U turn, we think it now looks unlikely to do so. That means it's now looking like a case of back-to-reality. And the reality just isn't as exciting.

Aldi and Lidl offer customers cheaper alternatives, then there's more upmarket offerings like M&S Food, Waitrose and Ocado.

A place in the middle of the pack has its merits, but pressure from above and below has been mounting - meaning market share is being squeezed. And unlike Tesco, there's no plans to lift margins beyond the current 2.5% level.

But there are bright spots on the horizon. Sainsbury still expects to realise £200m of cost savings this year. That's not as heady as the yearly savings the merger would create, but it's impressive nonetheless.

Argos concessions are still going well, and their roll-out is set to continue. There's a strong online business too, with sales there helping to offset more difficult conditions in the main stores.

Prior to the price fall, the prospective yield was 3.8%. So investors are likely to be paid to wait while the group decides its next steps, but with the dividend linked to earnings, Sainsbury will need to find a way to increase profitability if that payout is to materially rise in the future.

Plan A was the merger - but if that comes to nothing, it will need to revitalise itself another way. It's still a good business on its own, but in an age of increasing competition, and with the door potentially ajar for a third party to swoop in and take the reins at Asda, 'good' won't always be good enough.

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Third quarter trading details (9 January 2019)

Sainsbury has confirmed falling clothing and general merchandise sales in the 15 weeks to 5 January offset slight growth in the core grocery division, leading total retail sales (excluding fuel) down 0.4%. On a like-for-like basis, that represents a slightly worse-than-expected 1.1% decline.

Grocery sales rose 0.4% in the period, led by online (+6%) and convenience (+ 3%). Sainsbury continues to invest in growing sectors of the market, including its 'free from' range, where sales rose 14%.

While Argos outperformed a weak and highly competitive market, group general merchandise sales fell 2.3%, and margins remain under pressure. The group says that's due to cautious customer spending and its decision to reduce promotional activity across Black Friday. Clothing sales dipped 0.2%.23 Argos stores were opened in Sainsbury's supermarkets, bringing the total to 274.

Sainsbury's Bank continues to grow, with a 9% rise in customers, and a mortgage book that now exceeds £1.2bn.

The group says it remains on track to achieve £200m of cost savings this year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.