Following Saturday's announcement that the UK's second and third largest grocers were in advanced negotiations to merge, the two retailers have now outlined how they expect to execute combining the Sainsbury's and Asda businesses.

Key features of the merger

• The combined group would create one of the UK's leading grocery, general merchandise and clothing groups, with combined revenues of £51bn for 2017.
• The Sainsbury's and Asda brands would be maintained
• Asda to continue to be run from Leeds and retain its own CEO
• Sainsbury's, Asda and Argos store networks to be combined to create a complementary network of 2,800 stores and several of the UK's most visited websites
• Walmart to own 42% of the share capital of combined business. It would keep two seats on the board of the new business, and receive £2.975bn of cash (subject to customary completion adjustments), valuing Asda at £7.3bn on a debt free, cash free and pension free basis

A full investigation by the Competition and Markets Authority (CMA) is now expected, with Sainsbury's and Asda aiming to complete the merger in H2 2019.

Rationale for the deal

In the merger document, Sainsbury's highlights how the retail sector is undergoing rapid change as customers' shopping habits continue to evolve, as evidenced through the shift to smaller baskets and more frequent shopping trips, the greatly increased popularity of the discount channel, the expansion of online and the blending of grocery and general merchandise businesses.

Customers' desire for greater value, choice and convenience has led to intense competition across grocery, general merchandise and clothing. By bringing together Sainsbury's and Asda, the two retailers expect to create a stronger and more resilient business.

Sainsbury's and Asda shared the following rationale:

• The merger would enable investments in price, quality, and range while also creating more flexibility to shop in stores and across digital channels. Sainsbury's expects to lower prices by up to 10% on many products that customers buy regularly, while pooling the businesses’ channel expertise will create more options for shoppers
• Their 330,000 employees should gain from new career opportunities, and no store closures are planned
• The deal promises to deliver at least £500m of net synergies after investments in price.  £350m are expected from harmonising buying terms, £75m from opening Argos in Asda stores and £75m from operational efficiencies

 

Comments on the deal

Mike Coupe, CEO of Sainsbury's: "This is a transformational opportunity to create a new force in UK retail, which will be more competitive and give customers more of what they want now and in the future. It will create a business that is more dynamic, more adaptable, more resilient and an even bigger contributor to the UK economy. Having worked at Asda before Sainsbury's, I understand the culture and the businesses well and believe they are the best possible fit. This creates a great deal for customers, colleagues, suppliers and shareholders and I am excited about the opportunities ahead and what we can achieve together."

Judith McKenna, Walmart International, President and CEO:"This proposed merger represents a unique and bold opportunity, consistent with our strategy of looking for new ways to drive international growth. Asda became part of Walmart nearly 20 years ago, and it is a great business and an important part of our portfolio, acting as a source of best practices, new ideas and talent for Walmart businesses around the world. We believe this combination will create a dynamic new retail player better positioned for even more success in a fast-changing and competitive UK market. It will unlock value for both customers and shareholders, but, at the same time, it's the colleagues at Asda who make the difference, and this merger will provide them with broader opportunities within the retail group. We are very much looking forward to working closely with Sainsbury's to deliver the benefits of the combined
business."

Roger Burnley, Chief Executive Officer of Asda:"The combination of Asda and Sainsbury's into a single retailing group will be great news for Asda customers, allowing us to deliver even lower prices in store and even greater choice. Asda will continue to be Asda, but by coming together with Sainsbury's, supported by Walmart, we can further accelerate our existing strategy and make our offer even more compelling and competitive. From my six years with Asda and ten years with Sainsbury's, I know first hand that both organisations are fortunate to employ some of the most talented and customer-focused colleagues in this market and I am excited by the opportunity of the two coming together."