By James Davey
The industry's biggest UK deal for over a decade brings together the country's second- and third-largest food retailers, aiming to generate savings and buying power to better compete with fast-growing discounters, a bigger Tesco after its purchase of wholesaler Booker, and the rise of online shopping.
The cash and shares deal, announced on Monday, also provides a potential exit route for Walmart, as Asda, which it bought in 1999 for 6.7 billion pounds, has been struggling to grow as discounters Aldi and Lidl attract its price-conscious customers.
Sainsbury's said the combination would generate synergies of at least 500 million pounds and enable prices to be lowered by about 10 percent on many products.
However, the transaction faces significant regulatory hurdles. Britain's Competition and Markets Authority (CMA) said it was likely to review it.
Nevertheless, Sainsbury's shares jumped as much as 21 percent to 327.1 pence, their highest since July 2014 and were on course for their biggest ever daily gain, while shares in rivals Tesco and No. 4 Morrisons fell.
Walmart will receive 3 billion pounds in cash and a 42 percent stake in the combined business' equity, valuing Asda at about 7.3 billion pounds on a debt-free basis. Sainsbury's equity was valued at 6 billion pounds at Friday's close.
Though Sainsbury's CEO Mike Coupe said the deal was "a merger, not an acquisition," Sainsbury's is the senior partner.
Coupe, who used to work for Asda, Sainsbury's Chairman David Tyler and finance chief Kevin O'Byrne will all retain their positions in the merged company. Asda CEO Roger Burnley, who worked at Sainsbury's for a decade, will continue to run the Asda business, which will retain its separate brand.
Analysts said the deal was a bet that recent changes in the retail industry - including the rise in online shopping, discounters and Tesco's purchase of Booker - would ease any opposition from competition regulators.
Coupe said "the world has changed and there is more competition than ever," since the sector's last mega deal - Morrisons' takeover of Safeway in 2004.
"I'm 100 percent confident that we will not close any stores as a result of this transaction," Coupe said, noting that even if the CMA demanded store divestments they would be sold as trading entities.
Some analysts were not so sure, saying buyers could be hard to find. "We see no chance of it getting through the CMA without a major dismemberment of the combined business," said Peel Hunt analyst Charles Hall.
"This will only be possible if there is an acquirer for a significant proportion of the business and Morrisons is the only acquirer that makes sense."
However, the surprise decision by the CMA to unconditionally clear the Tesco/Booker deal may have encouraged Sainsbury's and Asda to believe they could get a viable transaction through.
Together, Sainsbury's and Asda have around 2,800 stores, more than 330,000 employees and a combined market share of 31.4 percent versus Tesco's 27.6 percent, according to market researcher Kantar Worldpanel.
DIFFERENT CULTURES
The deal comes as Britain's big four grocers continue to lose share to Aldi and Lidl and are also having to deal with growing demand for internet grocery shopping and the relentless march of Amazon.
And it follows Tesco strengthening its position with its 4 billion pounds purchase of Booker, completed two months ago.
Sainsbury's and Asda have different cultures and appeal to different customers, with London-based Sainsbury's strong in own-brand products, and Asda, headquartered in Leeds, northern England, focused on price. There is, however, quite a big overlap in Northern Ireland.
Some 350 million pounds of the planned synergies would come from buying savings, and 75 million from putting branches of Sainsbury's general merchandise specialist Argos into Asda stores. Sainsbury's bought Argos in 2016 for 1.1 billion pounds.
"Sainsbury's continues to surprise us with their aggressive deal-making," said Jefferies analysts, who have a "hold" rating on the supermarket group's stock.
After a two-year lock-up period, Walmart is allowed to reduce its stake in the combined group to 29.9 percent, and after four years could exit completely.
Bernstein's Bruno Monteyne pointed to the risks of bringing together companies with different cultures, noting Morrisons-Safeway lost 28 percent of their sales through a combination of store sales, integration problems and culture clash when they merged in 2004.
The Qatar Investment Authority, currently the largest shareholder in Sainsbury's with a 22 per cent stake, said it supported the deal.
Sainsbury's also reported its full-year results on Monday, showing a first rise in profit in four years.
($1 = 0.7256 pounds)
(Additional reporting by Sarah Young, Editing by Mark Potter)
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