J Sainsbury plc (LON:SBRY) and Walmart Inc (NYSE:WMT) Asda could still get the go-ahead from the competition watchdog for their £12bn merger despite "universal opposition" to the deal, according to Shore Capital analysts.
Bosses of the two supermarket groups were roasted by MPs over the merger when they appeared before the Environment Food and Rural Affairs (EFRA) committee on Wednesday.
Sainsbury’s chief executive, Mike Coupe, and Asda counterpart ,Roger Burnley, were accused of quoting "Mickey Mouse figures" in response to questions about the deal’s impact on suppliers, staff pay and cost savings.
“We are not children, you can’t just come in here and give us a nursery rhyme,” Committee chairman Neil Parish said.
“Come on, let’s at least get some sense out of you, even if it’s not the truth.”
Parish said he was concerned that the cost of the merger would end up falling on the suppliers of the two supermarkets.
He told Burnley to stop “talking baloney” after the Asda chief said the supermarkets would deliver 10% price cuts on everyday items by pressuring larger suppliers, such as US cereal giant Post Holdings, which supplies Weetabix.
"Chair, I can categorically say the synergy benefits are not based on taking 10% savings from individual suppliers," Burnley said.
Price cut claims 'unsUBStantiated' and 'vague'
ShoreCap analysts said they "remain surprised and a little disappointed" that the original Sainsbury-Asda merger statement was allowed to make "vague and still unsubstantiated claims" that prices will be cut by 10% on everyday lines.
"We were under the naive impression that such announcements required more precision and accountability," they said.
"Put another way, not unaccountable bland statements. The FCA may like to revisit this point."
Parish also questioned the supermarkets’ estimate that their combined share of the grocery market would be 25%. The estimate includes rivals such as Marks and Spencer Group (LON:MKS) and B&M Bargains. But data that only takes into account the main grocery chains indicates that the market share of the combined group would be closer to 30%.
Burnley insisted that Asda and Sainsbury’s would continue to operate as two separate brands after Parish said he expected the companies to eventually become one supermarket.
Sainsbury's and Asda need to convince CMA
Following the roasting from MPs, ShoreCap said it noted “pretty much universal opposition” to the proposed merger at this stage but it will be up to the Competition and Markets Authority to decide.
“Sainsbury and Asda's management speak very confidently and they are expensively advised,” ShoreCap said.
“As such we remain of the view that this deal could still be approved although we are far less clear as to the potential remedies and whether or not those remedies can be satisfied to the regulator's satisfaction. We are also unclear about the ultimate timescale of this whole process.”
The broker added that CMA approval is only the first hurdle with the merging of two businesses that must compete in public and collude in private being the “most challenging feature of all of this whole exercise”.
ShoreCap maintained a ‘hold’ rating on Sainsbury’s.
UBS left a ‘buy’ rating on Sainsbury’s, saying it sees the merged group delivering about 33p pro-forma earnings per share and 35p per share in free cash flows at synergy maturation.
“Ultimately, it's the independent Competition and Markets Authority (CMA), rather than MPs, which will clear or block the proposed merger,” it said.
Earlier this week, the CMA published a summary of views received from interested parties on the impact of the merger.
Respondents raised concerns that it could lead to higher prices and reduced choice for customers, the UK competition watchdog said on Monday.