Investors are pleased as sales are up and the quarterly dividend gets a boost.
Asda/Sainsbury merger proves to be a deal too far for the CMA
- It seems CEO Mike Coupe may have to adjust his lyrics this year after Sainsbury’s shares slump to a near a 20-year low
- Merger block not entirely unexpected after CMA seemed inclined to block proposal in their February statement
- Given the 6% drop in share price, we suggest a ‘medium risk hold’, but would not argue with investors wanting to jump ship
The merger block was not entirely unexpected given that the CMA had already given a strong indication in February that it was inclined to block the proposal, saying that it might lead to higher prices and a worse shopping experience for customers. The CMA had suggested that the combined group would have to sell a lot of its supermarkets and both companies had indicated a willingness to sell up to 150 stores. Sainsbury’s responded today by saying that the intention of the merger was actually to lower prices and that the CMA was “taking £1bn out of customers’ pockets.
While this is significant news for the supermarket sector it was widely expected given the size of the combined group and the CMA’s previous comments. The feeling that there are too many supermarkets in many parts of the UK persists, so it is unlikely to be the last merger proposal put before the CMA. What is bad news for Sainsbury’s is positive news for others in the sector including discounters Aldi and Lidl. Sainsbury’s shares dropped 6% in early trading to near a 20-year low. The difficulty for investors is that Sainsbury’s trading position is not especially positive given falling sales in the latest update and declining market share. Given the drop in the shares we suggest a ‘medium risk hold’ in the hope that the bad news is now in the price, but we could not argue with investors who decide to jump ship.
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