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Sainsbury - CMA blocks merger with Asda

George Salmon | 25 April 2019 | A A A
Sainsbury - CMA blocks merger with Asda

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

Sell: 189.75 | Buy: 189.90 | Change -0.65 (-0.34%)
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The Competition and Markets Authority (CMA), has blocked the merger of Sainsbury and Asda.

The CMA's final ruling stated the deal would result in higher prices for customers. As a result, Sainsbury and Asda have agreed to terminate efforts to create a partnership.

Sainsbury shares fell 3.7% following the announcement.

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Our view

The CMA's decision hasn't come as a huge surprise - the competition regulator and Sainsbury haven't exactly seen eye to eye since this process began.

The problem is a lot of hope was pinned on the deal going ahead. Somewhat embarrassingly for Sainsbury, it now needs to go back to the drawing board.

The group was relying on the merger to help it stand out in a crowded market place. Aldi and Lidl offer customers cheaper alternatives, then there are more upmarket offerings like Waitrose, M&S Food and Ocado. And with the latter two teaming up to boost M&S' online footprint, competition is at fever pitch.

A place in the middle of the pack has its merits, but pressure from above and below is putting the squeeze on. And unlike Tesco, there are 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. Added to that, 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.

The prospective yield is now 4.8%, so investors are likely to be paid to wait while the group decides its next steps. But it's worth remembering the dividend is 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 now that's off the table, Sainsbury will need to revitalise itself another way. It's still a reasonably 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.