The planned merger of Sainsbury’s and Asda was dealt what looks like a body blow by objections raised last week by the Competition and Markets Authority.
While the grocers may attempt to fight the regulator, thoughts are already turning to what a plan B might look like.
For Sainsbury’s, the most pressing issue is to up the trading ante at its core business.
Performance has been lacklustre – the latest Kantar data showed a decline in sales and loss of market share – and was hindered, anecdotally at least, by shortcomings such as poor availability.
“Asda’s performance has certainly been improving after a period when it seemed to lose its way”
Walmart-owned Asda, however, could face more fundamental choices.
When the deal was announced last April, Walmart International chief executive Judith McKenna described Asda as “a great business and an important part of our portfolio”.
But even though Walmart would have retained a stake in the enlarged business, there’s no getting away from the fact it had decided to uncouple itself from that “great business”.
It’s little wonder there is now speculation that an alternative buyer may be sought.
But don’t bank on a private equity swoop on Asda.
The last big food deal in a similar vein was the £1bn acquisition of Somerfield by a consortium led by private equity firm Apax in 2006. The grocer was then sold on to The Co-op for £1.57bn – a deal struck almost exactly a decade ago.
That length of time alone is a reminder of how grocery has been transformed since.
When it updated earlier this month, Asda was able to report a seventh consecutive quarter of growth – like for likes were up 1% in the fourth quarter. Operating income was down, reflecting investment in the turnaround programme but, overall, Asda is making progress.
But is that enough to flush out a buyer?
The fact that market leader Tesco has an “ambition” of making a margin between 3.5% and 4% on group sales of around £50bn shows just how hard it is to make money – which is why Sainsbury’s wanted to merge with Asda in the first place.
An Asda takeover could not be about releasing latent value. It would necessitate execution skills par excellence in one of the most fiercely fought retail categories.
All to safeguard, never mind increase, margins that are not likely ever to be much more than wafer thin.
Even if that can be achieved, where’s the turn for a private equity owner? A future trade buyer could prove hard to find, a concern only likely to be intensified by the CMA’s unwillingness to sanction the Sainsbury’s-Asda deal.
Similarly, demand for shares in the event of an IPO by a private equity backer might also be subdued because of the maturity of both Asda and its competitors.
“The other option would be to seek a different sort of deal entirely… as old and new players combine strengths”
An IPO in the short term, with no intermediate ownership and after which Walmart retained a stake, might prompt greater appetite.
Priced to go, and if Asda could assure investors of a reliable income stream from holding the shares, there could be an argument for the grocer’s return to the stock market.
For that to happen, there needs to be more evidence that Asda’s turnaround is sustainable.
The other option would be to seek a different sort of deal entirely.
Morrisons’ supply deal with Amazon, or this week’s confirmation that Ocado and Marks & Spencer are discussing a joint venture, perhaps indicate the direction of travel on deals, as old and new players combine strengths.
Over to Walmart.