In the past year, both Asda and Sainsbury’s have been cutting jobs, both in stores and in head offices. Competition is fierce from discounters Aldi and Lidl and also from a revitalised Tesco. Times are hard for the UK´s retailers and have been so for quite a while. Nevertheless both Sainsbury’s and Asda are turning in profits, although a strong positive trajectory in terms of financials is less clear to see with Sainsbury’s reporting a dip in profits in terms of 2016 versus 2017, and Asda´s 2016 performance reported as the worst since Walmart acquired them in 1999.
So the logic for the merger, viewed in terms of the UK market is fairly clear. Bigger should mean better buying power and the opportunity for synergies. For Mike Coupe and the Sainsbury’s management team, who have been identified in the press release as the new executive if the merger goes ahead, the attraction of running what will be the UK´s largest retailer is also fairly clear.
The world´s largest retailer is still Walmart, familiar to anyone who has spent any time in the US. Walmart acquired Asda for £6.7 billion – at the time this represented a 20% premium on the share price. When this deal was struck there was much talk in the business press of how Walmart´s massive discounting superstores would revolutionize the UK retail market. This hasn´t really happened and although retail revolution is underway it is not being led by Walmart.
Under the terms of the new deal Walmart will receive £3 billion in cash, and a 42% stake in the newly merged Sainsbury’s/Asda operation. Current market capitalization of Sainsbury’s is around £7 billion and the valuation of Asda used in the deal is also £7 billion as reported. 42% of 7+7 (Market Cap of Sainsbury’s plus valuation of Asda) is £5.9 Billion. This would suggest that after 19 years of Walmart ownership little significant value has been added to Asda. Indeed, at first glance it looks like Walmart could have obtained a better return by putting their money in the bank in 1999. So has Walmart´s adventure in the UK been a failure? Well, probably not, as Asda is still profitable and whilst there has been no huge growth, Asda still represents a significant asset and Walmart´s largest non-US operation.
In February this year Walmart CEO, Doug McMillon, said that Walmart´s key priorities were: “our North American core and key growth markets including China and India.” It also seems clear that Walmart is increasingly concerned with the threat from the online retailers like Amazon or China´s Alibaba. So perhaps we should see the current decision by Walmart as primarily defensive. Retail is generally a very tough environment and never more so than at the current time, with “online” taking more and more market share and austerity continuing to squeeze prices. Nevertheless, opportunity remains. Consumer spending (and hence revenues) continue to climb, and it has never been easier to reach customers. This deal allows Walmart to recover a significant amount of its original investment, whilst still owning the largest share of the UK´s biggest retailer, assuming the merger proceeds. Managing your risk in turbulent times seems prudent – and predicting the future of retail seems more difficult than ever.