LONDON: Britain's competition regulator on Thursday blocked Sainsbury's proposed 7.3 billion pound ($9.4 billion) takeover of Walmart owned Asda - a huge blow to the supermarket groups who wanted to combine to overtake market leader Tesco.
The Competition and Markets Authority (CMA) ruling is also a major setback for Sainsbury's Chief Executive Mike Coupe, the architect of the deal and the group's boss since 2014.
Coupe made unwanted headlines when he was caught on camera singing: "We're in the money" shortly after the deal was announced last April. Analysts said questions will be raised over his future after it failed to win approval.
The deal would have resulted in a substantial lessening of competition at both a national and local level, with prices rising in stores, online and at petrol stations, the CMA said.
Coupe took issue with the CMA's analysis.
"The specific reason for wanting to merge was to lower prices for customers," he said in a statement.
"The CMA's conclusion that we would increase prices post-merger ignores the dynamic and highly competitive nature of the UK grocery market. The CMA is today effectively taking 1 billion pounds out of customers' pockets."
Sainsbury's, Walmart and Asda said they had mutually agreed to terminate the transaction, opting not to challenge the CMA's ruling through the courts.
As well as leapfrogging Tesco, the deal would have given Walmart a way to exit Britain, one of the weakest performers in its global portfolio.
Shares in Sainsbury's were down 5.1 percent at 0820 GMT, extending their losses over the last three months to 23 percent.
WORSE OFF SHOPPERS
After delivering a damning provisional report in February, the CMA's final report was equally stern, finding that UK shoppers and motorists would be worse off if Sainsbury's and Asda combined.
"We have concluded that there is no effective way of addressing our concerns, other than to block the merger," said Stuart McIntosh, chair of the CMA inquiry group.
Sainsbury's share of the UK grocery market has dropped from 15.8 percent to 15.3 percent in the last year, while Asda's has fallen from 15.6 percent to 15.3 percent, according to data from market researcher Kantar.
All of the big four grocers have lost share to German discounters Aldi and Lidl, which now have a combined 13.6 percent share. Tesco has 27.4 percent.
Sainsbury's and Asda have argued that their share of the total market for food was smaller than the data indicated because of the emergence of new players like delivery services, but the regulator was not persuaded.
Coupe said he was confident in Sainsbury's strategy, which focuses on own-brand products, and on the quality, provenance and ethical credentials of its food.
Judith McKenna, CEO of Walmart International, said she was disappointed by the CMA's ruling.
"Our focus now is continuing to position Asda as a strong UK retailer delivering for customers. Walmart will ensure Asda has the resources it needs to achieve that," she said.
The implications of the deal failing are likely to be significant. Some analysts believe Sainsbury's will have to undergo a major shake-up that could see new chairman Martin Scicluna part company with Coupe.
Analysts at Jefferies believe the risk of a reinvigorated market leader Tesco continuing to recover customers historically lost to Sainsbury's needs addressing with urgency.
Earlier this month Sainsbury's lost its status as Britain's No. 2 supermarket group by market share to Asda, according to Kantar data. Tesco in contrast is gaining momentum, reporting a 34 percent jump in full-year operating profit on April 10.
With one potential exit route from Britain for Walmart blocked, analysts have said the U.S. group might instead consider a stock market listing of Asda or try to sell it to private equity.
The Sunday Times reported in February that private equity group KKR was mulling an offer for Asda.
But both of these avenues are problematic.
"The problem with the idea of private equity is that the only way PE makes money is to have its own exit and there isn’t one because you can’t break-up Asda now," one senior UK supermarket director told Reuters.
"The problem with an IPO is – what growth prospects are you selling? The story to investors is not a very good one," he said, adding that Walmart may decide to run Asda as a profit centre and simply instruct CEO Roger Burnley to make them more money. - Reuters