What you need to know about this deal
J Sainsbury, currently the third biggest supermarket in the UK sought to buy rivals Asda, the second biggest for £7.3bn.
Stuart McIntosh, chair of the inquiry group, rejected the merger and issued an unusually forthright judgement outlining their reasoning. He said: “It’s our responsibility to protect the millions of people who shop at Sainsbury’s and Asda every week. Following our in-depth investigation, we have found this deal would lead to increased prices, reduced quality and choice of products, or a poorer shopping experience for all of their UK shoppers.
“As well as affecting in-store customers, the merger would result in increased prices and reduced quality of service, such as fewer delivery options, when shopping online. Furthermore, it would lead to motorists paying more at over 125 locations where Sainsbury’s and Asda petrol stations are located close together.”
The CMA looked at a range of issues such as the increased competition from discount stores like Lidl and Aldi and how new or expanding competitors could affect the retail market including online. They took particular interest in the statement from the companies’ that they would cut some prices and found that overall the merger would reduce competition and more likely lead to price rises than price cuts despite the companies promising to make a £1bn worth of price reductions if merged – approx. a 10% cut in the price of popular foods according to Sainsbury’s CEO Mike Coupe.
What went wrong?
If the merger had been allowed to be completed the new group would have been responsible for every £1 in £3 spent in UK supermarkets, would immediately have become the UK’s biggest private-sector employer with a workforce of over 330,000 people and an asset base of over 2,800 supermarkets, convenience stores and petrol stations.
The CMA indicated in February that it was minded to block the deal then due to its concerns or demand the sale of either a significant number of stores or even either the Sainsbury’s or Asda brand – which the companies decided was too high a price to pay.
Mike Coupe responded that although the companies had mutually agreed to terminate the transaction the CMA was “effectively taking £1bn out of customers’ pockets.”
“The specific reason for wanting to merge was to lower prices for customers,” he said. “The CMA’s conclusion that we would increase prices post-merger ignores the dynamic and highly competitive nature of the UK grocery market.”
Since the announcement this morning Sainsbury’s shares have fallen more than 4.5% and the big question for shareholders, investors and senior management of both Asda and Sainsbury’s is – what next?