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Sainsbury's-Asda tie-up makes economic sense but risks need considering, says HSBC

HSBC upgraded its rating on Sainsbury’s to ‘hold’ from ‘reduce’ and lifted its target price to 270p from 210p

HSBC thinks UK regulators may take some convincing to approve the deal

A merger between J Sainsbury plc (LON:SBRY) and Asda makes economic sense but there will be many difficult issues to consider, according to analysts at HSBC.

Sainsbury’s on Monday confirmed that it had agreed a £15bn deal to merge with Asda, which is owned by Walmart Inc (NYSE:WMT).

The deal to create the UK’s largest supermarket is expected to be completed in the second half of 2019, subject to shareholder and regulatory approval.

READ: Sainsbury's confirms £15bn Asda merger and dismisses reports stores will close

HSBC upgraded its rating on Sainsbury’s to ‘hold’ from ‘reduce’ and lifted its target price to 270p from 210p.

“The merger makes economic sense in a scale driven industry and we think Argos into Asda stores makes sense,” the bank said.

“But if the merger is given clearance, there will be many difficult issues to consider.”

Risks of Sainbury's-Asda tie-up

One of the risks HSBC cited is the potential to reduce synergies by running two supermarket chains with separate head offices, infrastructures, ranges and cultures. 

The UK Competition and Market Authority may also take some convincing to approve the deal, HSBC said.

“The CMA and competitive legislation in the UK is ultimately concerned about the consumer interest and potential market abuse,” the bank said.

“A key consideration will be that the Big 4 would become a Big 3 (or rather a Big 2 with Morrisons being around a third the size of each of the Big 2).”

The big four currently includes Tesco PLC (LON:TSCO), Sainsbury’s, Asda and WM Morrison Supermarkets (LON:MRW).

To remedy competition concerns, HBSC thinks the CMA is likely to ask the merged business to dispose a number of stores to rivals. The deal could also create store overlaps, resulting in the closure of sites.

“This merger would create a company (with about 29% market share) to rival Tesco (27% market share) but we would expect a number of store disposals should it be cleared (which is not guaranteed),” HSBC said.

Cost synergies 

However, HSBC noted that many buying synergies would be achieved, even in own brands where the same product could “just have different labels”.

Sainsbury’s expects the tie-up to generate £500mln in cost savings

“We upgrade to Hold as, while the standalone investment case remains challenged, the shares are likely to track sideways while the market digests the implications of this potential combination with Asda,” the bank said.

Shares in Sainsbury’s jumped 14% to 310p in morning trading. 

Quick facts: J Sainsbury PLC

Price: 208.24371 GBX

Market: LSE
Market Cap: £46.03 m

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