JSAIY J Sainsbury Plc (QX)

By Saabira Chaudhuri 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 26, 2019).

LONDON -- Regulators blocked the proposed merger between Walmart Inc.'s British grocery unit and rival J Sainsbury PLC, meaning the U.S. retail giant must now find ways to drive stand-alone growth for Asda Group in the U.K.'s highly competitive retail market.

Britain's Competition and Markets Authority said Thursday the grocery merger would reduce competition and could lead to higher prices for shoppers. Uncertainty about the deal's fate has been a distraction for the two retailers, and its rejection is a major disappointment for both.

One year ago, Walmart agreed to merge Asda into Sainsbury in a deal that valued Walmart's British arm at about GBP7.3 billion, or $9.4 billion. The U.S. retailer agreed to keep a 42% stake in the combined company, which would become Britain's largest grocery chain. The deal would have given Walmart greater heft in the U.K. while freeing it from daily decisions about competing in an increasingly difficult environment.

The move was part of a broader shift by Walmart toward joint ventures in highly competitive overseas markets. The retailer bought Asda in 1999, and it has been one of Walmart's most profitable foreign forays. But growth has slowed amid intense competition in the U.K. from traditional rivals such as Tesco PLC, new online players and discounters including German chains Aldi and Lidl.

The regulatory hurdles were high from the start given the concentrated nature of the U.K. grocery market, where the top four players command over a 60% share. But Walmart and J Sainsbury insisted they were confident of approval, saying the advent of online shopping and the rapid expansion of Aldi and Lidl in the U.K. had given consumers more choices,

British regulators disagreed, saying that even taking into account the increased competition their concerns about the merger hadn't been allayed.

"We have found this deal would lead to increased prices, reduced quality and choice of products, or a poorer shopping experience for all of their U.K. shoppers," said Stuart McIntosh, chairman of the group that conducted the competition investigation.

The collapse of the proposed merger puts both companies in a tough spot, but perhaps more so Sainsbury. The U.K. chain, which lacks the financial backing of a larger parent company, has been losing share to larger rival Tesco, and analysts said its profit margin would likely narrow if it is forced to step up investment.

The company's shares fell 4.7% in London on Thursday.

Sainsbury Chief Executive Mike Coupe said the competition regulator's conclusion ignores the dynamic nature of the U.K. market.

Walmart said it was disappointed by the decision but plans to invest in Asda to ensure the company can compete effectively in the U.K.

"Our focus now is continuing to position Asda as a strong U.K. retailer delivering for customers," said Judith McKenna, head of Walmart's international arm. "Walmart will ensure Asda has the resources it needs to achieve that."

Some analysts previously suggested that Walmart could look to sell Asda to a private-equity firm if the deal collapsed, but the business has recently improved its performance.

Earlier this month, research firm Kantar said Asda had overtaken Sainsbury to become the U.K.'s No. 2 grocery chain with a 15.4% market share. Asda, which historically has targeted lower-income customers, has increased its sales for two years, in part by attracting new shoppers from more affluent households.

"We do not think that Walmart is in rush to dispose of Asda. Asda was never considered a problem business," said Bernstein analyst Bruno Monteyne, who described the Sainsbury deal as a unique opportunity the U.S. company had to explore. "They will go back to good retailing."

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

April 26, 2019 02:47 ET (06:47 GMT)

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