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UK competition watchdog expected to block merger of Sainsbury's and Asda

Jefferies and JP Morgan think the CMA will reject the proposed merger of Sainsbury's and Asda

Sainsbury's and Asda will abandon their merger, JP Morgan predicts

The UK competition watchdog is expected to block the proposed merger of Sainsbury PLC (LON:SBRY) and Walmart Inc's (NYSE:WMT) Asda when it announces its final decision on the deal on Thursday.

In February, the UK Competition and Markets Authority suggested it was leaning towards rejecting the merger after provisional findings of its investigation raised “extensive competition concerns”.

READ: Sainsbury's likely to receive bad news from CMA on proposed Asda merger, says Jefferies

Concerns included higher food and petrol prices in markets where both companies have supermarkets and petrol stations, as well as reduced quality and choice for customers.

To alleviate the CMA’s worries, the companies agreed to sell up to 150 supermarkets, several convenience stores and a “sufficient number” of petrol stations.

They also promised to slash prices by £1bn each year by the third year after completing the merger.

However, many analysts predict the CMA will still block the deal.

JP Morgan and Jefferies expect CMA to rule against merger

JP Morgan said the CMA will either block the merger or state a conditional approval subject to the agreement of remedies.

“We think the former is significantly more likely, but both scenarios could ultimately lead Sainsbury and Asda to abandon the idea of the merger,” it said.

JP Morgan sees Sainsbury’s shares falling towards its 190p price target after the CMA announces its decision.

READ: Asda overtakes Sainsbury's as UK's second largest supermarket ahead of CMA's merger decision

Jefferies also sees the CMA ruling against the deal.

“In reality, we struggle to assume anything beyond a 20% chance of a drastic rethink by the CMA,” the broker said.

It added: “In addition, a recourse by the two grocers to a judicial review is not necessarily a given, and will need to reflect the balance of probability of success and the lengthy timetable that such an action would imply.”

CMA decision to overshadow Sainsbury's full year results 

The CMA's decision will come just days before Sainsbury's full year results statement on May 1.

JP Morgan said the quality of earnings, cash flow and current trading momentum will likely disappoint.

The investment bank cut its free cash flow prospects by about 15% on average for 2019-21 due to higher ‘exceptionals’ and headwinds.

Quick facts: J Sainsbury PLC

Price: 197.25 GBX

Market: LSE
Market Cap: £4.39 billion

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