The last thing President Emmanuel Macron needs right now is a merger between two of France’s biggest employers ahead of an election. Given the manifest potential for job losses and reduced competition in essential groceries, it’s convenient that talks to combine hypermarket operators Auchan and Carrefour SA have stalled. But the political context will change, and the deal’s financial and anti-trust obstacles aren’t as big as supposed.

There is an air of desperation about the two “big-box” retailers even attempting a tie-up in a world where consumers prefer convenience stores or shopping online. Carrefour’s stock has more than halved in value since 2015. Chief Executive Officer Alexandre Bompard has now tried three deals without success since 2018. Auchan, owned by the low-profile Mulliez family, doesn’t have a share price passing judgment but, like Carrefour, it’s been losing market share, according to data provider Kantar. Leader Leclerc and discounter Lidl remain formidable rivals.

A merger wouldn’t be a panacea. Analysts at Bernstein argue that bashing the behemoths together would create a “structurally challenged Leviathan” and distract from each firm’s existing turnaround plans.

But life together might still be less painful than continued independence for both sides. The duo could cherry-pick their portfolio and optimize their respective in-store offerings, say by rolling out some of Auchan’s non-food concessions more broadly. The goal would have to be to become a European Walmart Inc. — the U.S. giant has shown the large format has its place.

Above all, there would be efficiencies from deploying buying power and cutting duplicate functions. Before talks collapsed, the terms under discussion envisaged Auchan as the acquirer, Bloomberg News reported. Suppose Auchan found savings worth 2% of Carrefour’s 34 billion euros ($39 billion) of domestic sales, plus other piecemeal cuts internationally. That could add 1 billion euros of operating profit annually, worth perhaps 5 to 6 billion euros when taxed and capitalized, depending on one-off costs.

In turn, that justifies the mooted offer price of around 21 euros a share. This would value Carrefour at around 16.6 billion euros — a 37%, 4.5 billion-euro premium over its current market value. A sweetener may be needed to win over major shareholders — although Carrefour hasn’t been valued at that level since 2017.

The issue is turning the theory into reality. Commitments to stagger job reductions could buy political assent. The companies would probably have to make divestments to bring down their combined market share from the dominant 29% they’d start with — precisely how much isn’t clear (Tesco Plc has 27.5% of the U.K. market). Forced disposals usually mean selling below fair value. There may be just enough value creation here to compensate for that.

Finally, Auchan needs to get round the problem that its shares don’t have a public price. A solo all-cash deal looks like a stretch, and a private-equity firm is unlikely to want to add firepower as a minority partner. Auchan could do an initial public offering or merge with a blank-check company to put a price on its stock. But it’s hard to see investors dashing to put another French grocer in their trolley on the basis of the standalone strategy. Talks to merge with billionaire Xavier Niel’s special-purpose acquisition company were explored over the summer, according to Reuters. 

That leaves offering Carrefour shareholders a mixture of cash and a stake in the enlarged group, as was discussed. Perhaps a new listed company could be established which would absorb the two founding firms.

Carrefour shareholders would have doubts over the value that unlisted Auchan was contributing. But they may swallow those on two conditions: if anti-trust uncertainties were dealt with, and the synergies were so convincing that it didn’t matter if Auchan was entering the combo at a possibly inflated valuation. That would mean having firmly agreed disposals in place alongside the main takeover deal — effectively making this a transaction between three or more parties simultaneously.

It’s a huge effort for a deal that can’t be announced half-done. The continuing pain of suffering the status quo may be enough to make it happen.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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