JSAIY J Sainsbury Plc (QX)

By Ben Dummett, Sarah Nassauer and Saabira Chaudhuri 

LONDON -- Walmart Inc. is in advanced talks to sell a majority stake in its U.K. grocery chain Asda Group Ltd. to rival J Sainsbury PLC, according to people familiar with the situation, a sign that the retail behemoth aims to reduce risk in one of the world's most competitive markets as local players consolidate.

Such a deal would create a U.K. food giant with combined revenue of about GBP50 billion ($68.9 billion), according to the latest available financial results.

In a brief statement Saturday, Sainsbury, which has a market value of $8.16 billion, confirmed the talks and said it would make a further announcement Monday. Walmart will take a stake of about 40% in the new entity, according to a person familiar with the situation.

The U.K., where Walmart operates about 600 Asda stores, is the Bentonville, Ark., retailer's biggest overseas market by revenue. It 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.

But since then the operation has also proven to be 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 range and customer service.

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.

Because of this 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 response, the U.K.'s market leaders have been moving to bulk up.

Tesco PLC agreed last year to acquire Booker Group PLC, the country's largest food wholesaler, for GBP3.7 billion, catapulting it from the U.K.'s biggest supermarket chain to its largest food business.

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.

"It is likely that scrutiny would be a high and an investigation prolonged," said Neil Saunders, managing director of GlobalData Retail. "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."

Walmart and Sainsbury are likely to defend the merger in part by arguing the additional scale will allow the combined entity to cut operating costs and keep prices lower.

Should Sainsbury and Asda reach a deal, the combined entity would have a 27% share of the U.K. grocery market, surpassing Tesco, according to Kantar Worldpanel. The industry's leaders have lost market share in recent years, while Aldi and Lidl have made gains.

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 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."

According to Asda's latest available financial results, the grocery-store operator generated GBP21.7 billion in revenue in 2016, down 3.2% from the prior year. By comparison, Sainsbury increased sales 13% to GBP29.1 billion for its latest year ended March 11, 2017. That gain, though, mainly reflected benefits from 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.

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

Write to Ben Dummett at ben.dummett@wsj.com, Sarah Nassauer at sarah.nassauer@wsj.com and Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

April 28, 2018 13:51 ET (17:51 GMT)

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