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LONDON (Alliance News) - Shares in J Sainsbury PLC surged on Monday after the UK supermarket chain stunned the country's grocery sector with its GBP14 billion merger with rival Asda, a unit of US grocery giant Walmart Inc.
Sainsbury's shares were up 17% at 316.00 pence in afternoon trade, the star performer in the FTSE 100. Tesco shares were down 0.3%, while Morrisons reversed earlier losses to trade up 1.5%.
The move added around GBP1.71 billion to Sainsbury's total market value, which stood at around GBP6.92 billion on Monday afternoon.
Sainsbury's and Asda early Monday revealed their plans to create a UK retail powerhouse with combined revenue of GBP51 billion.
Over the past few years, UK supermarkets have come under increased pressure from German discounters Aldi and Lidl which have made their presence felt by taking a majority of the grocery market share.
Sales at Lidl and Aldi grew around 10% year-on-year in the 12 week period to March 25, with both retailers competing to become the country's fastest growing supermarket chain, according to the latest UK grocery market share figures published earlier this month by Kantar Worldpanel.
This compares to sales growth for the big four UK supermarkets of 2.4% for Tesco, 0.6% for J Sainsbury, 2.4% for WM Morrison Supermarkets and 1.8% for Asda.
In response to this growing threat, Sainsbury's agreed a deal which values Asda at around GBP7.30 billion on a debt-free, cash-free and pension free basis. As part of the deal, Walmart will receive 42% of the issued share capital in the combined business - though will hold no more than 29.9% of voting rights - and receive GBP2.98 billion in cash.
Under the deal, the enlarged company - which will have a 2,800 store network, including Sainsbury's-owned Argos branded ones - will see Sainsbury's Chief Executive Officer Mike Coupe, Chairman David Taylor and Chief Financial Officer Kevin O'Byrne retain their roles.
The company said the deal would enable investment in areas that would most benefit customers in areas such as price, quality and range. It also expects to lower prices by 10% on many of the products which customers buy regularly.
No store closures are planned as a result of the combination, Sainsbury's said.
"There are clear benefits from the two supermarkets joining forces, particularly when it comes to leveraging their combined buying power, which should result in both lower prices for customers and higher margins for the business. Sainsbury expects better buying terms to generate GBP350 million of efficiencies, while also lowering shop prices by 10% on some popular items," Hargraves Lansdown analyst Laith Khalaf said.
However, the analyst highlighted that the stance of the UK Competition and Markets Authority will be critical to the viability of this deal, citing the previous supermarket M&A deal between rival Tesco and wholesaler Booker Group.
Following the news of the deal the CMA said it was "likely" that the GBP14 billion merger between the second and third largest supermarkets firms would be subject to a review, amid concerns a combination would cause a duopoly.
"For Sainsbury's and Asda, though the fact that they have complementary regional footprints will mitigate in their favour. The competition authorities will also note that the combined supermarket will still only have around the market share of the industry leader, Tesco, in a sector where dominance has been brutally eroded by Aldi and Lidl. If Sainsbury's can demonstrate the merger will create lower prices for customers, that will help too," Khalaf said.
Sainsbury's said the deal will see it retain both its own upmarket brand alongside the more value-focused Asda brand.
The deal is expected to result in earnings before interest, taxes, depreciation and amortisation synergies of "at least" GBP500 million. The synergies will mostly come from buying benefits from scale, opening of Argos concessions in Asda stores and operational efficiencies.
Sainsbury's explained the deal will create a "highly cash-generative" firm which would enable a "faster de-leveraging profit" after completion.
"If the deal goes through, the prospect of Sainsbury, Asda, and Argos working together, with Walmart chipping in too, is a pretty powerful combination. It would also be good for consumers, who can expect lower prices as a result. Meanwhile the executives of other supermarkets no doubt have their head in their hands at the prospect of another price war," Khalaf added.
Sainsbury's separately reported a mixed set of annual results.
For the year ended March 10, the grocer's pretax profit declined to GBP409 million from GBP503 million the year prior. This was below the consensus estimate supplied by the company of GBP572 million.
However, underlying pretax profit - excluding exceptional costs - was modestly higher at GBP589 million from GBP581 million the year prior.
Profit performance was hurt by GBP180 million in exceptional costs in the period compared to GBP78 million the year prior. These included GBP85 million in costs associated with the integration of its Argos business and separation of Homebase. A further GBP85 million was associated with restructuring costs and GBP38 million on the transition of its Sainsbury's bank business to a new banking platform.
Sainsbury's proposed a 7.1 pence per share final dividend, up from 6.6p the year prior. For the full year, however, the dividend remained flat at 10.2p per share. Although this was higher than analysts' forecast of 9.8p.
