Morningstar | CMA Blocks Merger Between Sainsbury's and Asda in Line With Expectations; Shares Fairly Valued
On April 25, the U.K. Competition and Markets Authority, or CMA, issued its final report over the proposed merger of Sainsbury's and Asda, blocking the deal. This is in line with our expectations and follows the CMA's harsh preliminary assessment, which left no scope for the deal be approved. We maintain our GBX 273 fair value estimate and no-moat rating.In February, after the CMA announced its preliminary findings, we anticipated that no viable divestment plan could make the deal acceptable to the CMA and we lowered our fair value estimate to reflect the grocer's value as a stand-alone company. Sainsbury's said in a press release that all parties (J Sainsbury, Asda and Wal-Mart) mutually agreed to terminate the transaction, ending the one-year CMA investigation.
Although there are no surprises in the CMA's final report, its final decision to block the deal is still the most extreme outcome. The grocer is expected to release its fiscal 2019 results on May 1 and we believe management will be able to talk more about the company's strategic plans, since Sainsbury's has already lost valuable time while its main competitors (notably Tesco and other discounters) continue to outperform in a fiercely competitive and uncertain (Brexit) consumer environment. This is particularly important now, for two reasons: firstly, after the latest results are published, Tesco should be able to comfortably achieve its midterm targets, increasing the likelihood of more price cuts and secondly, synergies from Argos' integration have peaked, with cost savings the only way to defend margins.
Although, our long-standing thesis on Sainsbury's as a stand-alone firm remains, we think the share price, which decreased 5% after the announcement of the deal's rejection by CMA, may reflect uncertainty over Sainsbury's strategic future direction rather than the rejection itself (which was widely anticipated).
J Sainsbury is principally engaged in food, general merchandise and clothing retailing and financial services. Co. is organized into four operating segments: Retail (Food), which provides a range of food, including organic produce; Retail (General Merchandise and Clothing), which provides a range of products across home, clothing, technology and leisure; Financial Services (Sainsbury's Bank plc and Argos Financial Services entities), which provides products such as credit cards, insurance, travel money and personal loans; and Property Investment (The British Land Company PLC and Land Securities Group PLC joint ventures). At Mar 11 2017, Co. had 605 supermarkets and 806 convenience stores.
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