JSAIY J Sainsbury Plc (QX)

By Ian Walker 

British regulators said they were leaning toward blocking a proposed merger between Walmart Inc.'s British grocery unit and rival J Sainsbury PLC, threatening to scuttle one of the retail giant's biggest overseas overhauls.

Last April, Walmart agreed to merge British arm Asda Group into Sainsbury in a deal that valued the U.K. business at about GBP7.3 billion ($9.5 billion). Walmart agreed to keep a 42% stake in the combined company, which would become Britain's largest grocery chain.

The move was part of a broader shift by Walmart to form joint ventures in competitive overseas markets. Asda has been one of Walmart's most profitable foreign forays since it bought the chain in 1999. Growth has slowed more recently amid intense competition in the U.K., both from traditional players like Tesco PLC, online players -- including Amazon.com Inc., which owns Whole Food outlets in the U.K. -- and discounters like German chains Aldi and Lidl.

Regulatory hurdles always posed a threat to the deal. The U.K. grocery market is already highly consolidated, with the top four players commanding over 60%. A combined Asda-Sainbury would operate 2,800 stores and command a 27% market share, according to Kantar. It made about GBP51 billion in revenue in 2017.

On Wednesday, the Competition and Markets Authority said it has provisionally found that the deal, in its current form, could push up prices and reduce quality. It also said the merger could lead to a rise in prices at a large number of Sainsbury and Asda gas stations across Britain.

The regulator didn't specifically block the deal, but said that was one of the options it was considering. It said it could also force the companies to sell a significant number of stores or other assets. But the CMA said it didn't believe divestitures alone would address its concerns. It expects to announce a final report by the end of April.

Sainsbury shares were 15% lower Wednesday. Other U.K. grocery stocks also fell.

In a joint statement, Sainsbury and Asda said they fundamentally disagree with the provisional findings, citing a misunderstanding by the regulator of shopping habits in the U.K. They said the "CMA has moved the goalposts, and its analysis is inconsistent with comparable cases."

Last week, the CMA extended the timetable of its inquiry into the proposed merger due to the case's scope and complexity.

The setback comes as Walmart is rejiggering its overseas operations. Last year, it sold its controlling stake in its Brazilian operations and bought a majority stake in Flipkart Group, India's largest e-commerce company, for $16 billion.

Walmart has struggled with fierce competition in the U.S., where rival Amazon has broadened its branded food and own-label offerings while improving delivery options. Earlier this week, Walmart reported strong holiday sales, attributing part of that to its success attracting online shoppers.

Walmart has options if the deal is blocked, analysts said. James Grzinic at Jefferies said he expects a sale to happen either way. He said a private equity bid for Asda could be a possible option. "An alternative offer with no obvious regulatory concerns is likely to emerge quickly," he said.

Write to Ian Walker at ian.walker@wsj.com

(END) Dow Jones Newswires

February 20, 2019 06:06 ET (11:06 GMT)

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