Sainsbury’s and Asda seek to salvage deal with £1bn pledge

London — British supermarket groups Sainsbury’s and Asda have committed to deliver £1bn of annual price cuts as they attempt to salvage their proposed combination after being dealt a potentially fatal blow by the regulator.

They also said they were prepared to divest some supermarkets and petrol forecourts across both brands to get the deal through but did not provide figures.

The Competition and Markets Authority (CMA) in February said its initial view was that Sainsbury’s £7.3bn takeover of Walmart’s Asda should be blocked in the absence of the sale of a large number of stores, or even one of the brands.

With the CMA highlighting concerns that the combination could lead to higher prices, most analysts and competition lawyers believe it is highly unlikely the deal will proceed.

As well as setting out their planned price cuts, the two companies also took issue with parts of the CMA analysis.

“Sainsbury’s and Asda strongly disagree with the CMA’s provisional findings and have found the CMA’s analysis of their proposed merger to contain significant errors,” the supermarkets said on Tuesday.

Alleged mistakes include coding errors in the analysis of fuel selling, double counting Asda Living stores as convenience stores, using a flawed online survey and failing to question competitors’ submissions enough.

The two groups said these errors were compounded by the CMA setting a threshold for identifying competition problems “at an unprecedentedly low level”, which generated “an unreasonably high number of areas of concern”.

Sainsbury’s shares, down 25% over the past six months, were up 2.5% near midday in London.

Sainsbury’s, Britain’s second-biggest supermarket chain, and third-ranked Asda agreed to the deal last April, aiming to overtake market leader Tesco. It also would give Walmart a way to exit Britain, one of the weakest performers in its portfolio. The two companies hoped their combined buying power would enable them to better compete with fast-growing discounters Aldi and Lidl and online retailers like Amazon.

Sainsbury’s and Asda said they would invest £300m in the first year after combining and a further £700m over the following two years as cost savings flow through. Sainsbury’s and Asda had previously said they would cut prices on “everyday items” by about 10%, financed by £1.6bn of cost savings, but had not quantified the effect in cash terms.

The two groups said the price commitments would be independently reviewed, with the results published.

Sainsbury’s said it would cap its fuel gross profit margin at no more than 3.5p a litre for five years, while Asda will guarantee its existing fuel pricing strategy. Sainsbury’s also committed to pay small suppliers with turnover of less than £250,000 within 14 days, while Asda will continue to pay its small suppliers within 14 days.

“We hope that the CMA will properly take account of the evidence we have presented and correct its errors,” Sainsbury’s CEO Mike Coupe and Asda CEO Roger Burnley said. “We have proposed a reasonable yet conservative remedy package and hope the CMA considers this so that we can deliver the cost savings for customers.”

The CMA’s final report is due by April 30.

If the final report differs little from its provisional findings, Sainsbury’s and Asda’s last chance would be to challenge the ruling through the Competition Appeal Tribunal, a specialist judicial body, which can throw it back to the CMA.

If approved, the deal would create a company with annual revenue of about $66bn, more than 2,800 stores and a grocery market share of about 31%.

Reuters