Overview of the deal
Estimated value: £10bn
Announcement date: April 2018
Advisors: Morgan Stanley, UBS
The supermarket industry is experiencing a bout of toughening competition driven by the expansion of German, low-cost supermarket chains Lidl and Aldi, Tesco’s £4bn acquisition of wholesale business Booker Group, and most prominently Amazon’s entrance into the industry through their £10.4bn acquisition of Whole Foods, which generates fear that they will disrupt the industry through technological innovation. This merger is a defensive strategic move to allow both Sainsbury’s and Asda to maintain competitiveness in the wake of this unprecedented market shake-up.
The purchase will be paid for with a mix of equity and cash where Asda’s parent company, Walmart, will receive £3bn in cash and a 42% stake in the combined business, but has vowed to hold less than 29.9% of the combined entity’s voting rights. The deal is the textbook example of a horizontal merger with the merged entity holding a 31.1% market share.
The NewCo will operate a “dual-brand strategy”, and will so retain both the Sainsbury’s and Asda brand as they are today. Sainsbury’s have stated that economies of scale will allow for price decreases of 10% on everyday essentials. Overall, this would allow both firms to weather the increasing competition as a more efficient, powerful, single entity.
“Alongside Tesco, Sainsbury/Asda would mean two companies controlling almost two thirds of Britain’s food sales. Small suppliers would face an intensified squeeze. No amount of store sale “remedies” would make a significant impact on this dominance. [...] Above all, this is another test of whether UK authorities are serious about competition.” -Neil Collins, Financial Times
Company details (J Sainsbury)
Sainsbury’s is the second largest supermarket chain in the UK. It currently holds a 15.8% market share.
- Founded in 1869, headquartered in London
- President and CEO: Mike Coupe
- Number of employees: 181,900
- Market Cap: £7.14bn - EV: £6.23bn
- LTM Revenue: £28.46bn - LTM EBITDA: £1.21bn
- LTM EV/Revenue: 0.22x - LTM EV/EBITDA: 5.5x
Company details (Asda Stores Ltd)
Currently the third largest supermarket chain in the UK. Asda is a subsidiary of Walmart after a takeover in 1999. It currently holds a 15.3% market share.
- Founded in 1965, headquartered in Leeds
- President and CEO: Roger Burnley
- Number of employees: 165,000
- Market Cap: N/A* - EV: N/A*
- LTM Revenue: £22.22bn - LTM EBITDA: £1.18bn