D-day has arrived for Mike Coupe, the under-pressure boss of Sainsbury’s, and his £12 billion bet on an Asda merger that will define his period as chief executive.
The competition watchdog’s initial verdict on Sainsbury’s audacious tie-up with its smaller rival, triggered when the deal was announced ten months ago, has landed and the news isn’t good.
Coupe’s promise to investors from the merger of Britain’s second and third-largest supermarkets was to generate at least £500 million in cost savings and benefits if the deal goes through. Then there was the headline-grabbing pledge it would lower prices by 10% on items like milk and bread, which has been met with some scepticism.
But the Competition and Markets Authority has to ensure it doesn’t lead to less competition, higher prices for shoppers or a squeeze on suppliers. And it fundamentally disagrees with Coupe’s own assessment of the threat from German discounters Aldi and Lidl and online rivals, which have been luring shoppers away from the Big Four supermarkets over the past decade.
Although the findings are provisional, they are a pretty good indicator of how the mega-deal will shape up, if it isn’t abandoned altogether. The regulator wants “significant” numbers of store disposals or it will ditch the deal, or even a sell-off of one of the Sainsbury’s and Asda brands altogether before it gives its blessing to the tie-up.
That might destroy the rationale for the deal after the CMA originally identified 463 areas of the UK where the merger would raise competition concerns. That has now gone up to 629 areas in today’s damning assessment.
In contrast, when Tesco bought wholesaler Booker, the CMA earmarked 369 areas of concern and ended up waving it through without demanding any shop disposals. In the merger between bookmakers Ladbrokes and Coral, 798 stores were identified and the regulator said they should sell 359.
The mood music on this deal sounds ominous. So what happens now?
Navigating the remedies demanded by the CMA to give the deal the green light, particularly the “significant” number of store disposals, will eat into Coupe’s £500 million cost savings target.
Anything over 150 stores and the disposals would hurt the economics of the deal, while 180 could bring it to a crashing halt, analysts think. But the regulator today went further and said it could press for the sale of one for the brands completely, effectively killing the deal.
The CMA has been pretty clear and prescriptive in who it thinks will be able to buy the stores, drastically limiting the shopping list of potential buyers.
The watchdog said it “would need to be satisfied that any purchaser has a strong management team with a proven track record in UK groceries retailing, can demonstrate a commitment to competing across all the relevant markets, and is able to demonstrate an ability to compete effectively by reference to a credible business plan”. But one of the most credible suitors, Tesco, looks a doubt, as too many of its stores are near Sainsbury’s and Asda’s.
Another reason that the CMA is pushing for the sale of a brand is online grocery sales. It is concerned that many customers “would wish to continue to use the existing web offerings” regardless of who provided the service.
That prompts “a need to achieve an effective remedy” to the lessening of online competition identified by the watchdog.
Clifford Chance partner Nelson Jung and a former CMA director said: “The crucial thing here is that the CMA has identified competition concerns that go above and beyond local areas as a result of Sainsbury’s and Asda overlapping. It has also lowered the bar for intervention [demanding remedies] than what we’ve seen in the past. This could have far-reaching implications for other deals.”
Supermarket for sale
Amazon could be the dark horse. It has kept the City guessing after it told the watchdog in November that acquisitions and investment in the UK grocery market are on the table.
It recently emerged that it secured sites in London for Amazon Go, a small, cashless convenience store. The fact that it has a meagre 1% of the grocery market in Britain could work in its favour. It could use Whole Foods, which it bought in 2017, to expand and make the grocery market more competitive.
But the CMA’s stringent conditions on a UK track record could put the mockers on the US behemoth, particularly as the watchdog said it “may also take into account the current scale of the purchaser’s operations, in the UK and abroad” to judge if its business would be able to provide an effective competitive constraint.
Morrisons is touted as the most interested buyer, but could play hardball on how much it is willing to fork out for any stores the merged pair are forced to sell, particularly with a glut of supermarkets due to hit the market.
Suitors could even go as far as asking for extra cash from Sainsbury’s and Asda to change the shop fascia to their own or replace some of the systems, one former supermarket chief says. Sources played down Morrisons’ interest today, although a private equity bid for Asda, whose parent Walmart is desperate to offload it, remains reasonably likely.
Another possibility is one of the smaller players like B&M and Iceland teaming up with Aldi and Lidl to split the space, effectively forcing Sainsbury’s and Asda to cede terrain as part of a deal that’s meant to futureproof the business against competition.
The spat with the CMA
Predictably Sainsbury’s disagreed with the conclusions of the watchdog, accusing it of “moving the goalposts” and rejecting the chance to put money in people’s pockets.
You’d expect tensions to rise over a deal of this magnitude, but this is strong stuff and the bickering has been going on virtually since the deal was announced.
The back-and-forth between Sainsbury’s and the regulator turned particularly sour in December when the grocer took the CMA to court. A blizzard of papers from the watchdog flooded in over two days in November with the supermarkets chain expected to respond in seven days.
A source close to the watchdog said Sainsbury’s hasn’t been particularly easy to deal with either. It emerged that Coupe had met with Alex Chisholm, the ex-CMA chief and now permanent secretary in the Department for Business, Energy and Industrial Strategy, which was seen by the CMA as an attempt to go behind its back.
This deal might not be quite dead, but it is on life support. Coupe bravely said today that he’ll “fight on”, but the CMA says it’s “likely to be difficult” for him to satisfy their concerns. A return match in court over the regulator’s methodology looks likely.
Even if the deal does go through the tie-up leaves the likes of Morrisons looking dangerously exposed and could even trigger a wave of defensive mergers resulting in even less choice. And if that happens, it means the watchdog could find itself back in business again before long.
As for Coupe, he’s bet the farm on this deal. His Argos purchase proved a hit, but whether his credibility as a chief executive can survive the likely collapse of this bold — or flawed — attempt to reshape the UK grocery landscape remains to be seen.