What a difference a year makes.
Twelve months ago, J Sainsbury Plc and Walmart Inc.’s Asda were triumphantly celebrating their 7.3 billion-pound ($9.5 billion) union and boldly predicting that there would be few competition constraints.
But in February the Competition and Markets Authority published a provisional assessment that was much harsher than anyone expected, and the deal looks dead. The CMA will release its final ruling on Thursday.
It is possible that the regulator will soften a little — particularly if it believes it will have to justify its view in the courts. But given its level of opposition, any more than that looks unlikely. If the CMA upholds its hard line, then the companies have two choices: seek to overturn it through a legal challenge, or abandon the deal altogether.
It may be tempting for both companies to play for time through a judicial review. That would give them more room to work on their backup plans. But the wisest course for Sainsbury is to walk away. Hopefully it will realize that a bit of patience now could pay off down the road.
To recap: The CMA said the deal could affect competition in 629 local areas. Potential remedies included blocking the deal, forcing the combined group to sell off one of its brands or requiring significant store disposals, potentially to a single buyer.
The next steps are much clearer for Asda, which could be a target for a private equity buyer. While acquiring the supermarket isn’t without complications, it is possible, particularly if Walmart were to retain a stake.
Sainsbury now has little choice but to carry on with its stand-alone strategy. The trouble is, its overture to Asda has created the impression that it needs to find a partner, in turn raising doubts about that strategy. That might explain why its shares have never recovered from February’s disappointment.
Meanwhile, its performance has deteriorated over the past year. A time-consuming court fight would distract from improving its underlying sales.
Even if new chairman Martin Scicluna believes Mike Coupe should continue as chief executive officer, Coupe may not want to carry on. Competing against the German no-frills supermarkets, which continue to take market share, as well as a reinvigorated Tesco Plc and Wm Morrison Supermarkets Plc won’t be as inspiring as creating his legacy through the combination of Sainsbury and Asda.
And he certainly has room to walk away: The CMA has taken such a critical stance that he could legitimately say that he tried to do the deal for the benefit of investors and employees, but was prevented from doing so.
But the CEO isn’t necessarily boxed into this dispiriting corner. The transaction may prove only to have been delayed.
Any private equity owner of the U.K. arm of Walmart will eventually seek an exit, perhaps in as soon as five years. When that finally happens, the regulator may have a different view of competition — while in 2019 it underestimated the threat from the U.K. arms of Aldi and Lidl, in the future the CMA might be forced to reconsider its approach.
That’s little comfort to Sainsbury right now. But it does show that leaving Asda on the shelf today doesn’t rule out buying it later.
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Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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