The competition watchdog’s provisional findings on the proposed merger of Asda and Sainsbury’s have thrown cold water on the prospect of the merger going ahead.

Rather than identify the number of stores that would need to be divested, as had been expected, the Competition and Markets Authority (CMA) raised concerns about the tie-up in just about every conceivable way.

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The CMA raised concerns about competition on national and local grounds and by expressing concerns about the nature of competition online an in stores – including major stores, convenience stores and at petrol stations.

The CMA even outlined how difficult the required level of store divestments would be to carry out.

Supermarket competition

The merger was an uphill battle from the start – on a national level the concerns were clear – it would create a chain which, together with Tesco, would control more than half of the UK food market.

Asda and Sainsbury’s countered this with the claim that this disguised the increased competitiveness of the market, most importantly the rise of Aldi and Lidl.

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It was expected that the degree to which Aldi and Lidl would be able to compete with the proposed merging parties would be central to the CMA’s findings.

The competition regulator said the German discounters (along with Waitrose) were a constraint on both Asda and Sainsbury’s, but not to the extent of the other members of the Big 4.

The CMA found 629 local areas where a substantial lessening of competition could take place, and this indicates that it did not consider the level of competition constraint that Aldi and Lidl were imposing to be very significant at all.

It seems that the CMA did not buy the central strategy of the deal: that it would benefit consumers by using their combined might to negotiate down major suppliers and pass on much of the benefit to shoppers in reduced prices.

Asda and Sainsbury’s talked about cutting prices by 10%, but they never made it clear how many products would be affected and how long this would continue. These assurances did not sound convincing enough and perhaps a more detailed commitment may have helped their case.

What now for Sainsbury’s

Sainsbury’s CEO Mike Coupe says he will fight on, possibly because he cannot concede without losing face.

The confidence he placed in getting the deal past the CMA in light of its previous – generous – decision to allow Tesco to buy Booker now looks like a serious misjudgement, and recent results have seen Sainsbury’s fall behind its rivals, inviting the suggestion that management has taken its eye off the ball. It is also difficult to see how the CMA could back down given the strength and breadth of its concerns.

Mike Coupe may feel hard done by, but the CMA made clear that the Tesco-Booker deal was passed because it considered the acquisition to be a vertical one, by a retailer of a wholesaler, and so viewed that the combination did not significantly damage the competitiveness of either market. The rights and wrongs of that decision are debatable but it looks difficult for Mr Coupe to argue that the CMA’s decision is in direct contradiction of its concerns with Asda/Sainsbury’s now.

The CMA’s findings sent shares in Sainsbury down by 15%, effectively back to near where they were before the merger announcement almost a year ago, indicating that investors no longer think the deal will happen.

Backing a legal challenge would be throwing good money after bad, and perhaps Mr Coupe should face up to this sooner rather than later, and focus his efforts on getting Sainsbury’s back to where it should be, and preparing for whatever challenges Brexit brings.

What now for Asda?

The merger represented a way out of the UK for Walmart. It may have planned to retain a 42% stake in the combined company, but its voting share was planned to be sub 30%, giving up any control, and was cashing out to the tune of £3bn, with perhaps a view to reducing its stake further in the future. In short, we do not believe Walmart will want to keep Asda as it is, should the merger not occur.

This gives way to the possibility of selling Asda to other suitors, but it is unlikely any other UK major players would consider it, given the strictness the CMA has displayed.

It opens the possibility of private equity or floating the business, or a foreign retailer entering the market. Amazon will always be speculated about, but we do not believe that taking on a major physical food presence in the UK fits its strategy, despite the Whole Foods deal in the US, which was a distressed (i.e. cheap) business more focussed on affluent customers.