It will be “difficult” for the Sainsbury’s-Asda deal to come back from this.
‘Provisional’ looks final
The competition regulator was at pains to stress its ‘provisional’ view. “At this stage in its Phase 2 investigation, the Competition and Markets Authority (CMA) has found that the proposed deal could lead to a worse experience for in-store and online shoppers across the UK”. In theory, Sainsbury’s, which fundamentally disagrees with the finding, and other ‘interested parties’, could now come back with strong counter-arguments to the watchdog’s contention that the tie-up could lead to a “substantial” decline in competition. “These are our provisional findings” The CMA notes, “…the companies and others now have the opportunity to respond.” But the CMA isn’t leaving its door open particularly wide. Its current view is that it’s “likely to be difficult for the companies to address the concerns it has identified”. And certainly, the implied remedy of disposal of “a significant number of stores”—say supermarkets in the 629 areas of concern singled out by the CMA, half Sainsbury’s store base—looks like a non-starter. Sainsbury’s has made clear that the deal’s rationale would be undermined if store sales in the hundreds were required. Legal action is possible. But given the exhaustive nature of the ongoing review, the chances that Sainsbury’s cuts its losses look higher.
Tesco to the fore
A 16% tumble of the No. 2 supermarket’s shares duly wipes out last year’s 9% gain and a bit more. That acknowledges positive, though lacklustre progress, of late, at the group’s core food retailing business. It paled against the performance of established supermarket rivals. Argos, which drove Sainsbury’s underlying sales growth for around a year following the purchase of Home Retail, has also faltered in recent quarters. In other words, the stock’s resilience last year was largely predicated on the probability of a big chunk of inorganic growth. There’s now more than an air of inevitability about those prospects. Yet before Sainsbury’s thinks up alternative strategies, it’s still sporting a small premium to long-term intrinsic value compared to small discounts for Tesco and Morrisons. Both of the latter are also taking the fight to the discounters with new low-cost formats of their own. At the same time, Tesco’s operating strength is increasingly muscular as it inches towards a targeted 3.5%-4% margin in this financial year. It’s expected to generate free cash flows of about £1.6bn vs. £500m expected at Sainsbury’s this year. These days, retail investment cases stand or fall on cash that can be deployed to ‘invest in price’. All told, 2018 might be the last year Sainsbury’s shares top High Street rivals for some time.