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Sainsbury’s share price deteriorates as merger investigation escalates

Sainsbury’s [SBRY] share price briefly rallied in mid-December after the Competition Appeal Tribunal ruled in favour of its legal challenge against the UK’s competition and markets authority (CMA) investigation of the its planned merger with Walmart-owned [WMT] Asda. 

The judicial review ruled in the parties’ favour, and found that the CMA had treated its investigation of the merger “unfairly” by not allowing them enough time to respond to materials and attend a hearing. It granted additional time to submit documentation in support of their deal. 

The grocery giants had argued that the current timetable didn’t give them “sufficient time to provide and consider all the evidence, given the unprecedented scale and complexity of the case”.

The CMA launched its investigation into the merger in August to look into whether the deal would mean less consumer choice, higher prices for both consumers and suppliers, or worse service, especially given that the combined group would make it Britain’s biggest grocer.

Following the extension over the Christmas period for the companies to submit further evidence, the CMA has now delayed the publication of its findings until early February, while the final deadline for a ruling on the merger remains 5 March. 

5 March

Final deadline for ruling on the Sainsbury's Asda merger

The direction of the ruling remains unclear, creating much uncertainty around Sainsbury’s stock price. After spending four days rallying following the granting of the extension, its stock price had fallen 11 points by the end of last week.

Sainsbury's share price performance, London Stock Exchange interactive chart, as at 7 January 2019

 

What’s next for Sainsbury’s shares?

Some analysts have argued that the legal challenge has dampened investor and trader sentiment of the deal. Russ Mould, analyst at AJ Bell, compared the request to that of a child asking for an extension on their homework. 

“Getting such a big and complex transaction over the line was never going to be an easy task and [the] announcement from Sainsbury’s reveals just how tricky its £15bn combination with Asda is proving,” Mould said, adding that investors might begin to question the retailers’ management capabilities.  

The CMA said in a statement that “if we gave all the companies the extra time they are now asking for, it would put our ability to complete the investigation by the required deadline at very serious risk”. 

Berenberg Bank is meanwhile hopeful that it will be a short-term negative, but still agrees that sentiment has been dampened. “Whilst Sainsbury’s stresses this review is about process, rather than content, it still implies to us that Sainsbury’s is not satisfied with the combination of both,” the bank said in a note. It has, along with UBS, reaffirmed its buy rating for the supermarket chain at the start of 2019.

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