Walmart's Asda grocery chain to merge with Sainsbury's

Dive Brief:

Walmart has announced a merger between its U.K.-based Asda grocery chain and upmarket U.K. grocer Sainsbury's. If given the green light, pending various approvals, Walmart will hold 42% of the combined business, according to a press release published on Monday.
Under the terms of the deal, Walmart will additionally receive £2.975 billion (about $4.1 billion at current exchange rates) in cash, valuing Asda at roughly £7.3 billion, (about $10 billion — a figure that does not include debt, pension or cash liabilities).
Asda will continue to be run from Leeds by CEO Roger Burnley, who will join the Group Operating Board of the combined business. Walmart notes that the merger will create one of the U.K's largest grocery, general merchandise and clothing retail groups. Combined revenue for the two businesses hit £51 billion (roughly $71 billion) last year.

Dive Insight:

If the merger goes through, the combined business will hold a network of more than 2,800 Sainsbury's Asda and Argos stores, and about 30% of the U.K. grocery market.

Together, the chains could topple market leader Tesco, Neil Stern, a partner at McMillanDoolitte, wrote in an op-ed for Forbes on Monday. Historically, Sainsbury's is a more upscale grocer catering to high-income earners in areas like London, whereas Asda focuses on delivering the lowest price to customers in more suburban or rural locations. "Now, Waitrose has supplanted Sainsbury’s on the premium end and the two large German discounters, Aldi and Lidl, have gobbled up market share in the value sector," Stern wrote. "The result has been increased pressure on profitability in the sector for some time."

To Stern, the move is notable because it does not play into the narrative Walmart has been growing over the last year or so, in which it has gobbled up competitors like Jet.com or niche brands like Bonobos, Modcloth and others. Instead, the retailer is vying to create one of the largest U.K. grocers from the backseat.

According to a statement from Moody's Lead Retail Analyst Charlie O'Shea emailed to Retail Dive, if the deal is completed along the terms announced it will be credit positive to Walmart.

"[The sale] will provide it with the ability to redeploy assets to avenues with more fertile opportunity for growth," he said. "Given the competitive landscape in U.K. grocery retail, profitable growth and expansion opportunities are limited, so reducing resources makes sense, especially when there are other geographies and channels with greater 'runway'."

But some argue that the combination of businesses may be potentially confusing to consumers, and detrimental to their independent brands. "It is hard to see how the Sainsbury’s brand and operations will align with the everyday low price model of Walmart International," James Butcher, managing director for Solutions for Retail Brands, said in a statement emailed to our sister publication Food Dive. "These proposed changes could confuse customers and be damaging to both the Asda and Sainsbury’s brands. While I do have a lot of respect for Mike Coupe, and it is still early days, this move is considerably more questionable than its acquisition of Argos two years ago."