Barclays Capital is now assuming an 80% chance of success for the proposed merger of J Sainsbury PLC (LON:SBRY) and Walmart Inc's (NYSE:WMT) Asda, leading them to upgrade their rating for the FTSE 100-listed food retailer.
In a note to clients, the bank’s analysts raised their rating for Sainsbury’s to ‘overweight’ from ‘equal-weight’ and increased their target price to 375p from 300p previously.
READ: Sainsbury's-Asda merger raises competition concerns, CMA reveals
The analysts said they believe Sainsbury’s is worth 400p per share on a merged basis and 285p on a standalone basis.
They pointed out that they have long thought that a merger of Sainsbury and Asda makes sense, though the question is whether the likely competition remedies will render the proposed deal uneconomic.
The analysts noted that although the view of the Competition & Markets Authority (CMA) will likely remain unknown until mid-2019, they “are sceptical about store disposals being highly material given that both companies have taken extensive advice and are investing considerable credibility into the transaction.”
The analysts added that having had more time to run the numbers and explore alternative scenarios, they are now assuming an 80% chance of success for the deal.
Asda added to forecasts
The analysts have incorporated Asda into their forecasts for Sainsbury’s from 2020⁄2021 onwards, with the outcome some very significant earnings accretion.
They pointed out that for the second year post-completion (ie the year to March 2022), they estimate the combined entity would have earnings per share (EPS) of around 36p, about a 60% boost compared with a standalone Sainsbury’s forecast of around 22p, driven partly by synergies and helped by the fact that the deal is around 40% debt-funded.
Even in their cautious scenario, the analysts said they estimate 2020/2012 EPS of around 29p, a 30% earnings accretion, which would still see the stock trading at about a 25% discount to the Tesco PLC (LON:TSCO)/ Wm Morrison Supermarkets PLC (LON:MRW) average for the same year.
Synergy estimate conservative
The analysts also said that their model assumes £500mln of net synergies, as per guidance, however, they pointed out that that the companies noted that the synergy estimate only includes price harmonization with suppliers - not an improvement - and that there is nothing included for non-food.
They also believe that Sainsbury’s banking business may also recover from its recent slump.
Sainsbury’s will issue a first quarter trading update next week, on 4 July, and the Barclays analysts expect the firm to report like-for-like sales growth of -0.1%, down from +0.9% in the fourth-quarter of last year.
In mid-morning trading, Sainsbury’s shares were 2% higher at 312p.