Two blue-chip brokers have removed their ‘buy’ recommendations and slashed their price targets for J Sainsbury plc (LON:SBRY) after the UK’s competition watchdog put its proposed £10bn merger with Asda in jeopardy.
Provisional findings from an in-depth investigation by the Competition and Markets Authority (CMA) suggested that the tie-up could lead to a “sUBStantial lessening of competition” and higher prices.
READ: Sainsbury’s plunges as CMA hints at Asda merger block
A few possible remedies have been mooted, such as selling off stores or one of the brands entirely, but the regulator seemed to pour cold water on those ideas, claiming it is “likely to be difficult for the companies to address the concerns it has identified”.
Berenberg and UBS are now in agreement that the deal almost certainly won’t go ahead, which is a worry for Sainsbury’s as it was looking to the merger and the subsequent scale it would bring to help it remain competitive amid tough trading conditions.
Banks agree deal is dead
“This [expected decision] shifts the focus back on Sainsbury’s underlying business, where we have three key concerns,” said Berenberg analysts in a note to clients.
“i) inferior top-line momentum relative to peers because the company does not benefit from wholesale growth, ii) weak earnings momentum as Argos synergies dissipate and iii) high leverage.”
UBS’s research team echo those concerns, noting that “the standalone organic growth story is now uninspiring”, while recent like-for-like sales have been “lacklustre”.
Will Sainsbury’s need to raise money?
Berenberg thinks the merger’s likely collapse might have some longer-term consequences, too, especially seeing as chief executive Mike Coupe has been a staunch advocate of the deal.
“There is…a risk that the CMA’s decision could lead to a series of negative events, ultimately resulting in management change, kitchen-sinking and a capital raise. We see no prospect of the share price re-rating until this overhang is removed.”
The venerable German investment bank cut its price target down to 235p (from 338p) as it downgraded Sainsbury’s to ‘hold’ from ‘buy’.
Its Swiss peer, UBS, moved the stock down to ‘neutral’ and slashed its target to 245p (from 435p).
Sainsbury’s shares dropped 0.4% to 233.5p on Thursday morning, having shed almost 20% yesterday.