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Abu Dhabi, UAEMonday 17 December 2018

UK supermarket Sainsbury's in merger talks with Walmart's Asda

The deal would create a strong rival to supermarket leader Tesco

British supermarket chains Asda and Sainsbury's are reported to be in advanced talks for a possible merger. Facundo  Arrizabalaga/ Andy Rain/ EPA
British supermarket chains Asda and Sainsbury's are reported to be in advanced talks for a possible merger. Facundo  Arrizabalaga/ Andy Rain/ EPA

UK grocer J Sainsbury Plc is in advanced talks with Walmart Inc. about combining with its Asda unit, in what could be a multibillion-pound deal creating a stronger rival to British supermarket leader Tesco Plc.

Sainsbury's confirmed the talks following a Bloomberg News report and said a further announcement would be made on Monday.

The talks are an effort by Sainsbury's to gain scale in a brutally competitive retail market where department-store chain BHS, electronics retailer Maplin and the UK arm of Toys "R" Us have gone bust. For Walmart, the possible deal could pave the way for a further retrenchment of its international ambitions as the company focuses on competing with Amazon.com Inc. at home.

A combination of Sainsbury's, the UK’s second-largest grocer, with No. 3 Asda could push the combined company past Tesco. Each of the two smaller grocers has just under 16 percent of the UK market, according to Kantar Worldpanel, so a combined entity would have a nearly one-third share, compared with Tesco’s 28 percent.

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A representative for Asda declined to comment. Walmart could not immediately be reached for comment.

While the exact terms of the transaction couldn’t be immediately learned, Walmart could retain a significant stake in the combined entity, according to people familiar with the situation.

The talks come at a time when the country’s retailers are under a growing threat from Amazon. Supermarket operators have been cutting thousands of jobs in response to a pricing squeeze exacerbated by the Brexit-induced weakness of the pound. Combining the two companies would give them greater leverage with suppliers -- something Tesco has used to keep a lid on its sourcing costs.

Asda, known for its low prices, has struggled amid the rise of discounters Lidl Ltd and Aldi Stores Ltd, which have undercut the Walmart unit on its biggest selling point. Those companies, both based in Germany, have risen from also-rans to major competitors in the British market over the last decade.

Sainsbury Chief Executive Officer Mike Coupe previously worked at Asda and other UK retailers. London-based Sainsbury's, with a market valuation of £5.9 billion (Dh29.7bn), expanded into selling household goods via its £1.4bn of Argos in 2016. The Qatar Investment Authority is the company’s largest shareholder, with a 22 percent stake.

Walmart acquired Asda for £6.7bn in 1999, at a time when the US company was expanding aggressively overseas. Since then it has backed out of international markets ranging from Germany to South Korea.

Combining Asda with Sainsbury's could present challenges. The Walmart division is favoured by shoppers on tight budgets, while Sainsbury's appeals to a more affluent crowd. Sainsbury's has expanded aggressively into convenience stores and is focused on the south of England around London, while Asda has more large supermarkets spread across the country’s north. That geographical distribution limits store overlap.

Sainsbury's may have been encouraged by the regulatory response to Tesco’s recent purchase of wholesaler Booker Group Plc, which UK authorities cleared after concluding it posed no major threat to competition.