JSAIY J Sainsbury Plc (QX)

By Ben Dummett and Saabira Chaudhuri 

LONDON -- Walmart Inc. is in advanced talks to merge its U.K. grocery unit Asda Group Ltd. with rival J Sainsbury PLC, the latest industry move to add scale in the face of aggressive discounters.

In a brief statement Saturday, Sainsbury, which has a market value of $8.16 billion, confirmed the tie-up talks and said that it would make a further announcement Monday that is expected to outline the details of any transaction.

The talks come after rival grocer Tesco PLC agreed last year to acquire Booker Group PLC, the country's largest food wholesaler, for GBP3.7 billion ($5.1 billion), catapulting it from the U.K.'s biggest supermarket chain to its largest food business and opening up new avenues of revenue.

Like that deal, any merger between Asda and Sainsbury would likely draw antitrust scrutiny amid worries that consolidation could give the combined entity greater power to maintain or raise prices for food.

Together, Sainsbury and Asda would have a market share of over 30%, surpassing Tesco, according to Kantar Worldpanel.

Because of steep competition and large numbers of online shoppers, the U.K. grocery market is billed by many retail executives as the world's toughest.

In recent years, Tesco, Sainsbury and rival Wm Morrison Supermarkets PLC poured money into their operations, but Walmart held back. It tapped a string of Asda's most senior executives, including its operations chief, e-commerce head and two chief financial officers, and put them in positions in its U.S. business, weakening Asda's talent pool, say analysts.

Walmart agreed to acquire Asda in 1999 for about $10.8 billion, as part of the U.S. retail giant's goal at the time to double its international operations.

The U.K., where Walmart operates about 600 Asda stores, is the Bentonville, Ark., retailer's biggest overseas market by revenue. But it has also been the most problematic as sales have been hammered by competition from German discounters Aldi and Lidl. The pair have kept prices low by prioritizing speedy store deliveries, efficiency and high turnover at the expense of breadth of offerings and customer service. As part of that push, Aldi and Lidl take daily deliveries of a slim range of mainly private-label products, often with the look and feel of popular, branded items.

Walmart executives have indicated since October that though Asda isn't hugely profitable, they see it as a good source of cash flow. Still in February, Walmart Chief Executive Doug McMillon said that he sees the U.K. market as similar to the retailer's home market in North America -- "largely built out."

For its part, Sainsbury only recently digested its GBP1.4 billion takeover of Argos owner Home Retail Group in 2016. Argos, which sells everything from irons to furniture, has a strong distribution network that Sainsbury has been leveraging to compete with Amazon.

Although Sainsbury typically markets itself to slightly wealthier shoppers, the chain, like its peers, has struggled to compete against Aldi and Lidl. In March, it said it was cutting the prices of 930 everyday grocery products in its stores and online.

The talks between Walmart and Sainsbury were first reported by Bloomberg.

--Sarah Nassauer contributed to this article.

Write to Ben Dummett at ben.dummett@wsj.com and Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

April 28, 2018 11:22 ET (15:22 GMT)

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