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Walmart to sell Asda to Sainsbury’s in $10 billion deal

BY Marianne Wilson

Walmart’s newest move is positioned to cause a major shakeup across the U.K. grocery store market as two rivals join forces.

Walmart Inc. on Monday announced plans to sell its wholly-owned U.K. subsidiary, Asda Group Ltd., to J Sainsbury PLC in a deal that values the chain at about $10 billion. Under the terms of the agreement, which is subject to various approvals, Walmart would hold a 42% share of the combined business.

Similar to traditional U.S. supermarkets, Asda and Sainsbury’s have been under increased pressure from fast-growing deep-discount grocers Aldi and Lidl, and most recently, Amazon, which has a deal with U.K. grocer Morrisons to provide groceries to British customers via its Pantry and Prime service. Sainbury’s said Walmart would leverage its global scale and investment to support the combined business. Upon completion of the transaction, two Walmart representatives will join the merged company’s board as nonexecutive directors.

The agreement, if successful would create Britain’s largest supermarket group and one of its leading general merchandise and clothing retail companies, with more than 2,800 locations (including Sainsbury’s and its Argos banner, along with Asda). It would also result in some of the U.K.’s most-visited retail websites, with a combined 47 million customer transactions weekly.

“This proposed merger represents a unique and bold opportunity, consistent with our strategy of looking for new ways to drive international growth,” said Judith McKenna, president and CEO of Walmart International. “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 are very much looking forward to working closely with Sainsbury’s to deliver the benefits of the combined business.”

The combined company will be chaired by David Tyler, current chairman of Sainsbury’s, and led by Michael Coupe, current CEO of Sainsbury’s.

It will operate with a distinctive dual brand strategy. Asda will continue to be run by its own CEO, Roger Burnley, who would join the board of the combined business, “ensuring Asda retains its heritage and roots,” Walmart said.

“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,” Burnley stated. “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.”

The combined business is expected to generate at $688.62 million in cost savings and lead to a reduction in prices of about 10%, according to the grocers.

The move also comes on the heels of Walmart pursuit of a deal with Flipkart, India’s leading e-commerce player. The discount giant is negotiating to buy a more than 51% stake in the Indian online marketplace.

Walmart expects to recognize a non-cash loss of approximately $2 billion, which is based on the current value of shares to be received and current foreign exchange rates. The timing of the loss has not yet been determined, and regulatory approval could extend into the second half of 2019.

For commentary by industry analyst Neal Saunders, click here.

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Analysis: Merger of Walmart’s Asda and Sainsbury

Grocery retail has always been an intense battleground and nowhere is this truer than in the United Kingdom. A consolidated market with four giant players, the rise of online grocery services, and the dramatic growth of deep discounters have all conspired to erode margins and make market share gains extremely tough.

Against this backdrop, all players have been looking for ways to defend their positions and develop better economies of scale. The potential merger between Walmart’s Asda and Sainsbury’s is just the latest of these maneuvers.

From a scale perspective, a deal makes sense. The combined entity would have a 22% share of the U.K.’s food and grocery market. This is well above the share of the current leader, Tesco, which has 17.7%. Such a dominant position in grocery — along with the combined non-food business which includes Sainsbury’s Argos division, would create many opportunities for cost savings and buying efficiencies.

The deal is also genuinely additive in that Sainsbury’s and Asda have different market positions both geographically and in terms of the demographics they serve. There is some overlap, but it is far more minimal than that between, say, Sainsbury’s and Tesco.

However, in our view both of these advantages also create problems.

On the scale front, any deal would require approval from competition authorities. Given the highly consolidated market, it is likely that scrutiny would be high and an investigation prolonged. Furthermore, we believe that even if a deal was ultimately permitted, it may be subject to remedies such as store disposals and other measures which would be disruptive.

The differences between the two groups make a true merger almost impossible. Although it could be combined corporately, we believe it would be folly for the new entity to completely merge operations and brands. This limits the scope for savings and efficiencies and, if anything, adds complexity.

Aside from any synergies which are helpful to the bottom line, we also question how Sainsbury’s intends to generate growth from Asda. Walmart, which has scale and financial power on its side, struggled with its U.K. arm for years. While things now seem to be stable, it is hard to conceive what Sainsbury’s brings to the table that will drive growth to a new level.

These negative factors mean a deal is far from done. In our view, they also indicate that this is a defensive play. As necessary as they can be, moves made in defense are not always the most creative or sensible.

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GNC readies for store closings

BY Deena M. Amato-McCoy

GNC plans to shutter stores across North America this year.

As part of GNC’s ongoing plan to streamline its store portfolio, the retailer will close approximately 200 stores in the United States and Canada in 2018. It also plans to limit its new store openings for the year.

“Efforts toward favorable lease renegotiations or relocation opportunities are ongoing, and may impact the amount of stores closings,” according to the company.

The company ended the first quarter with 8,905 store locations worldwide.

For the quarter, net income was $6.2 million, compared with $24.7 million in the prior year. Earnings per share was $0.07, compared with $0.36 in a year ago. The company also recorded a $16.7 million loss on debt refinancing.

Revenue was $607.5 million, compared with $654.9 million in the first quarter of 2017. The drop was primarily due to the sale of Lucky Vitamin in September, which resulted in a $22.7 million reduction to revenue. Ending the company’s U.S.-based Gold Card Member Pricing loyalty program in December 2016 also resulted in a $23.0 million decrease in revenue.

Same-store sales increased 0.5% in domestic company-owned stores (including GNC.com). In domestic franchise locations, same-store sales decreased 1.9%. Despite overall sales declines, the company credited its brand mix and private-label weight loss product for attracting new customers and driving larger baskets.

Loyalty membership increased 12.3% to 12.8 million members, compared with December 31, 2017. Included in its loyalty membership are 935,000 members enrolled in Pro Access, a 23.6% increase, compared with December 31, 2017.

“During the first quarter of 2018, we continued to see the business improve, and were pleased with the progress of our strategic growth initiatives,” said Ken Martindale, CEO. “Notably, we delivered meaningful gross margin growth, driven primarily by increased penetration of our private-label brands. We continue to work to leverage our strength in innovation, expand our international presence and deliver a consistent, compelling experience at every customer touchpoint.”

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