Walmart selling Asda to Sainsbury’s, will hold 42% stake in merged company

Walmart announced early Monday (April 30) it is retreating from the United Kingdom in a $10 billion deal that garners it a 42% stake in Sainsbury’s in exchange for its grocery supermarket chain Asda. The move was not a surprise given Asda’s lackluster growth in recent years amid strong competition from Aldi, Lidl and Tesco.

It’s not the first time Walmart merged with a larger player in a difficult market. The retailer sold its Chinese company Yihaodian to JD.com and now holds a minority share in the larger JD.com.

The Sainsbury’s deal will create a retail chain with 2,800 stores and combined annual sales of $70 billion, putting Sainsbury’s and Walmart ahead of the lead competitor Tesco. Kantar estimates Sainsbury/Asda will control 31% of the grocery market share compared to 28% for Tesco.

“We believe the combination offers a unique and exciting opportunity that benefits customers and colleagues,” said Walmart President and CEO Doug McMillon. “As a company, we’ve benefited from doing business in the UK for many years, and we look forward to working closely with Sainsbury’s to deliver the benefits of the combination.”

The retailer said such partnerships can unlock value for shareholders and customers in the UK. Walmart plans to share its global retail network and knowledge to help the combined business grow in a highly competitive market.

Asda CEO Roger Burnley will continue to run Asda and will join the group operating board of the combined business, ensuring Asda retains its heritage and roots. Walmart expects the deal will generate synergies of $687 million (US) primarily in operational efficiencies. There are no plans to close any Sainsbury’s or Asda locations as a result of the merger. The deal also gives the combined company a wider range of formats including supermarkets, supercenters, convenience stores and digital.

“This proposed merger represents a unique and bold opportunity, consistent with our strategy of looking for new ways to drive international growth,” Judith McKenna, CEO of Walmart International, said in a statement.

Sainsbury’s CEO Mike Coupe released the following statement regarding the merger.

“This is a transformational opportunity to create a new force in UK retail, which will be more competitive and give customers more of what they want now and in the future. It will create a business that is more dynamic, more adaptable, more resilient and an even bigger contributor to the UK economy. Having worked at Asda before Sainsbury’s, I understand the culture and the businesses well and believe they are the best possible fit.”

Walmart U.S. grocery has benefited from talent exported from the U.K. and Asda subsidiary over recent years. McKenna, who served as chief operating officer for Walmart U.S. until her recent promotion to International CEO, came to the U.S. from Asda. Tom Ward, vice president of digital operations, and Mark Ibbotson, executive vice president in central operations for Walmart U.S., are also from Asda.

MARKET FEEDBACK
Retail analysts believe the Sainsbury’s/Asda deal is good for Walmart given its troubles growing and maintaining share in that market over several years. Walmart acquired Asda in 1999 and never was able to grow beyond the third largest grocery retailer.

Ben Bienvenue, an analyst with Stephens Inc., said the deal will allow Walmart management to focus on larger markets like China, Canada and Mexico as the company streamlines its international portfolio. Walmart execs have said that is a focus as investments continue in the U.S. business and technology that can be deployed in multiple markets.

Bienvenue said the deal will be slightly dilutive to Walmart earnings in year one as the company expects to incur a non-cash loss of $2 billion. But Walmart expects the transaction to be neutral to slightly accretive in subsequent years as the $687 million in synergies are realized. Bienvenue remains bullish on the shares with a target price of $108. Walmart is expected to provide more details on this deal when it reports earnings May 17.

Shares of Walmart (NYSE: WMT) rose 2% trading at $89.29 in the morning session on Monday. Over the past 52 weeks shares have traded between a low $73.13 and a high $109.98. Sainsbury shares (LON: SBRY) rallied on the deal, rising 16%.

Walmart also will receive $4.129 billion which could help finance the reported FlipKart deal for the Indian e-tailer should it come to fruition. The Sainsbury’s merger  is expected to close in the back half of this year.

ASDA TURNAROUND
During the first quarter ended March 31, Asda delivered its fourth consecutive quarter of positive comp sales growth. Last year Asda said a 2.6% growth in sales and returned to positive comp sales growth for the full year after dismal returns the three prior years.

Asda also posted growth in online groceries and clothing, the company reported. The Asda turnaround was a struggle. Walmart shifted management several times and instituted Project Renewal to win back lost market share. Burnley took over as CEO from Sean Clarke to start this year. Burnley held the chief operating officer role prior and before that he worked for Sainsbury’s.

Clarke ran Asda for 15 months before his reassignment. He is a veteran executive with two decades of experience at Walmart working in five international markets, including CEO of Walmart China.

In November, then Walmart International CEO David Cheesewright said Asda had been going through a critical transformation over the past year and a half as it worked to reverse negative same-store comp sales and try and regain lost market share to deep discounters Lidl and Aldi.

Analysts said Walmart Asda was still the third largest grocery player in the U.K. behind Tesco and Sainsbury’s. In recent years expansion from German grocers Lidl and Aldi eroded margins and sent sales downward. Walmart changed the Asda management again in July 2016 as Andy Clarke stepped down as CEO of Asda and Sean Clarke took over.

Cheesewright said then Walmart was investing heavily in the U.S. store turnaround strategy and his team at Asda was told to protect profits at all costs, even if that meant losing share.

Walmart’s Project Renewal in late 2016 was a step in the right direction as Asda invested about $355 million into lower prices, according to Cheesewright. He said then it would take time for lower prices to filter through. The better results were seen in 2017, when Asda’s same-store sales turned positive. Project Renewal also set out to revamp stores with new layouts, space swaps and fixture changes to reflect its latest thinking around large formats.

Stewart Samuel, analyst with IGD, told Talk Business & Politics the changes at Asda with Project Renewal were focused on driving operational improvements and he applauded that effort.

Sainsbury’s shares (LON: SBRY) rallied on the deal, rising 16%.