Walmart to Sell British Unit Asda to U.K. Rival Sainsbury -- 2nd Update

By Saabira Chaudhuri 

LONDON -- Walmart Inc. on Monday said it would sell its British arm Asda Group Ltd. to rival J Sainsbury PLC, a deal that values the chain at about GBP7.3 billion ($10.1 billion) and would, if successful, create the largest player in the U.K.'s fiercely competitive grocery market.

The deal, under which Walmart gets a 42% stake in the combined company and almost GBP3 billion in cash, will free the U.S. retailer from having to drive growth in a challenging market while allowing it to benefit from greater heft.

Asda has been one of Walmart's most profitable businesses since it was acquired in 1999 but growth has been capped by intense competition from a resurgent Tesco PLC, Amazon.com Inc. -- which has been pushing further into online groceries -- and increasingly popular discounters Aldi and Lidl.

The move is part of a broader shift by Walmart to form joint ventures in competitive markets and focus investments in areas executives think will provide growth. It is also in talks to sell its controlling stake in its Brazilian operations and in advanced discussions to buy a majority stake in Flipkart Group, India's largest e-commerce company.

Sainsbury Chief Executive Mike Coupe said he met Walmart's former international chief David Cheesewright to discuss a potential deal last year and the two sides had been in talks since. Mr. Cheesewright retired in January.

However, the deal will likely draw major antitrust scrutiny in the U.K. amid concerns the combined company would have too much power over food prices. The U.K. grocery market is already highly consolidated with the top four players commanding over 60%.

The combined company would operate 2,800 stores and command a 27% market share, according to Kantar. It made about GBP51 billion in revenue last year.

Sainsbury buying Asda "would represent a remarkable step-up in U.K. industry consolidation, if cleared," said Jefferies analyst James Grzinic, adding that the two companies would have to be "willing to accept very punishing conditions to secure an approval."

Nevertheless, Sainsbury's Mr. Coupe said the company in seeking regulatory approval wouldn't close any stores. He said online shopping and the rise of discounters made the industry more competitive today than when previous consolidations had required store closures. The company expects the deal to close in the second half of the year. Mr. Coupe didn't rule out selling stores.

The deal to combine the No.2 and No.3 players marks the biggest U.K. grocery consolidation since Wm. Morrison Supermarkets PLC bought Safeway PLC in 2004 and was forced to sell dozens of stores. Industry leader Tesco more recently completed last month the acquisition of Booker Group PLC for GBP3.7 billion -- another bid to gain heft, but that deal combined a wholesaler and a retailer rather than two retailers.

Sainsbury said buying Asda will add at least GBP500 million to earnings before interest, taxes, depreciation and amortization as it benefits from bulk buying and opening branches of Argos -- which sell everything from irons to chairs -- in Asda stores. Sainsbury bought Argos owner Home Retail Group in 2016 for GBP1.4 billion.

The companies plan to keep both the Sainsbury and Asda brands, which serve different customers, the former being more upmarket. The combined company will be led by Sainsbury's chairman and CEO, while Asda's CEO will join its board.

The Bentonville, Ark. company will have voting rights up to 29.9% in the combined company and two of its executives will join the board to find ways to cut costs on clothing and general merchandise as well as deploy Walmart's technology investments at Sainsbury.

Sainsbury said the two companies will lower prices by about 10% on "many" everyday products by asking suppliers for the lowest price on products both Asda and Sainsbury currently sell.

Write to Saabira Chaudhuri at [e-mail]

(END) Dow Jones Newswires

April 30, 2018 06:15 ET (10:15 GMT)

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