Shares in Sainsbury’s jumped by as much as 20 per cent this morning after the supermarket announced it was to merge with Asda, as the City gave its stamp of approval to the possible deal.
However, the proposed £7.3billion megamerger, which is subject to regulators’ approval, hit shares in rivals Tesco and Morrisons, which fell by 4 per cent and 2 per cent respectively in early trading but later recovered.
Sainsbury’s share gains also moderated later in the morning when the stock stood 15 per cent up on the day – a rise of 40.25p to 310.05p.
Share price jump: Sainsbury’s share price rose by as much as 20% after news of Asda merger
The announcement has also hit funds which have been ‘shorting’ retailers’ shares – betting that supermarkets would continue to struggle from continued competition from discounters like Lidl and Aldi and online rivals like Amazon.
Prior to today’s jump, Sainbsury’s shares had fallen by about 3.5 per cent over the past twelve month. They are the seventh-most shorted stock in the FTSE 100, and analysts have warned this will make it volatile.
Hedge funds have been shorting retailers’ shares heavily over the past couple of years as they bet they will continue to see business decline.
The practice of ‘shorting’ shares sees hedge funds borrowing shares in a company that they think will go down in price and selling them in the hope of buying them more cheaply later.
‘Given that shorting retailers has been a huge trade over the past two years, news of potential tie up between Sainsbury, the UK’s 2nd biggest supermarket and 7th most shorted stock, and Walmart subsidiary Asda could see many caught on the wrong side of the bet in early trade on Monday,’ analysts at LCG Research said.
The Sainsbury’s merger with Asda comes just as the two supermarkets were in danger of losing market share after regulators recently cleared Tesco and Bookers merger and Amazon acquired posh supermarket Whole Foods.
Sainsbury’s and Asda are the second and third largest supermarkets in the UK, and should the deal go ahead the new company could knock Tesco off the top spot as the combined entity would gain the biggest market share of 31.4 per cent.
‘The biggest announcement in the supermarkets sector for a while and the largest and most significant of all, is the Sainsbury and Asda merger which will be a game changer for the industry,’ said Helal Miah, investment research analyst at The Share Centre. ‘With roughly 16% of the market each, the combination will create the most dominant food retailer in the UK, well ahead of current leader Tesco.’
Competition: Should the deal go ahead the new company could knock Tesco off the top spot
If approved, the deal will see Asda’s owner, the US giant Walmart, taking a stake of 42 per cent in the enlarged group. Sainsbury will in addition pay £2.975billion to Walmart for control of Asda, while Walmart is to retain responsibility for the Asda pension scheme.
The new merged group would have 2,800 stores and a workforce of 330,000, with sales estimated at roughly £51billion, based on 2017 figures.
The deal is expected to complete in the second half of 2019.
Richard Lim, chief executive of Retail Economics said: ‘The combined retail group would create significant scale. It would enable better buying terms, the integration of Argos within Asda and drive operating efficiencies expected to deliver cost-savings of at least £500million.
‘If given the green light by the CMA, it would be a game changer in the industry. The potential tie-up could deliver price reductions across a range of products, putting it in a position to challenge Tesco and the discounters head-on.’
If approved, the deal will see Asda’s owner, the US giant Walmart, taking a stake of 42 per cent in the enlarged group
Traditional British supermarkets have suffered years of falling sales as shoppers flocked to German discounters such as Aldi and Lidl. They are also now facing the threat of online rivals like Amazon Fresh.
David Madden, market analyst at CMC Markets UK, said: ‘Competition in the sector is heating up and this proposed merger is further proof the stalwarts of the high street are keen to defend their territory.’
Along the merger announcement, Sainbury’s also unveiled its full-year figures, which it was supposed to announce on Wednesday.
Full-year underlying pre-tax profits rose by 1.4 per cent to £589million, and the group raised it final dividend by 8 per cent.
It comes as Sainsbury’s had a record Christmas period thanks to strong online sales and a solid performance from Argos, which it acquired two years ago when it took over Home Retail Group.