JSAIY J Sainsbury Plc (QX)

By Saabira Chaudhuri 

LONDON -- Regulators blocked the proposed merger between Walmart Inc.'s British grocery unit and rival J Sainsbury PLC citing competition concerns, meaning the U.S. retail giant must now find ways to drive stand-alone growth for Asda Group in the U.K.'s highly competitive retail market.

Britain's Competition and Markets Authority said Thursday the merger would reduce competition and could lead to price rises for shoppers. The decision is a major disappointment for both retailers for whom the uncertainty about the deal has proved a distraction since it was proposed.

One year ago, Walmart agreed to merge its British arm Asda into Sainsbury in a deal that valued the U.K. business at about GBP7.3 billion, or $9.4 billion. Walmart agreed to keep a 42% stake in the combined company, which would become Britain's largest grocery chain. The deal would have given it greater heft in the U.K. while freeing it from daily decisions about competing in an increasingly difficult environment.

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 but growth slowed amid intense competition in the U.K. from traditional rivals such as Tesco PLC, new online players and discounters including German chains Aldi and Lidl.

The regulatory hurdles were high from the start given the highly consolidated nature of the U.K. grocery market where the top four players command over a 60% share. But the companies insisted they were confident of approval, saying the landscape has become more fractured with the advent of online shopping and the rise in popularity of Aldi and Lidl who have been rapidly expanding in the U.K.

British regulators disagreed. After factoring in competition from discount stores and how new and expanding competitors could impact the landscape, their concerns about the merger hadn't been allayed, the CMA said.

"We have found this deal would lead to increased prices, reduced quality and choice of products, or a poorer shopping experience for all of their U.K. shoppers," said Stuart McIntosh, chair of the group that conducted the investigation.

The collapse of the proposed merger puts both companies in a tough spot but more so Sainsbury, which lacks the financial backing of a larger parent company. Sainsbury has been losing share to larger rival Tesco and analysts said its profit margin would likely decrease as it is forced to up investment.

Sainsbury's Chief Executive Mike Coupe said the CMA's conclusion ignores the dynamic and competitive nature of the U.K. market. The company's shares were down 4% in morning trading in London.

Walmart said it was disappointed by the decision but plans to invest in Asda to ensure the company can compete effectively in the U.K.

"Our focus now is continuing to position Asda as a strong U.K. retailer delivering for customers," said Judith McKenna, head of Walmart's international arm. "Walmart will ensure Asda has the resources it needs to achieve that."

Some analysts have previously suggested that Walmart could look to sell Asda to a private-equity firm if the deal collapsed, but the business has recently improved its performance.

Earlier this month, research firm Kantar said Asda -- which has historically targeted lower-income customers -- had overtaken Sainsbury to become the U.K.'s number two grocery chain with a 15.4% market share. The company has grown sales for two years, in part by attracting new shoppers from more affluent households.

"We do not think that Walmart is in rush to dispose of Asda. Asda was never considered a problem business," said Bernstein analyst Bruno Monteyne, who described the potential Sainsbury deal as a unique opportunity the company had to explore. "They will go back to good retailing."

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

April 25, 2019 06:05 ET (10:05 GMT)

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