There’s been a large jump higher in Sainsbury's (LON:SBRY) shares this morning after the supermarket struck a deal to takeover Walmart (NYSE:WMT) subsidiary Asda and create Britain’s largest grocer in terms of market share. The stock of Sainsbury’s rose by almost a fifth shortly after the open as traders rushed to buy after news of the deal broke over the weekend.
The end of the big four
The UK supermarket market had been characterised as the big four - that is Tesco (LON:TSCO), Sainsbury’s, Asda and Morrisons (LON:MRW) - for quite some time, with these firms enjoying a large market share thanks to their dominant position as part of an oligopoly. This has changed somewhat in recent years with the hegemony coming under threat from the emergence of budget discounters such as Lidl and Aldi who ate into their market share and the latest developments seem to be a by-product of this. Traditional players in the UK supermarket space have found the last few years challenging to say the least and Sainsbury’s clearly feel that the increase in market share and synergies that they expect to be realised through the deal would be highly beneficial going forward - and looking at the initial reaction in the stock market, investors seem to agree.
Regulators likely to take a keen interest
Given that a combination of Sainsbury’s and Asda current market share would see them control almost a third of the UK grocery market and overtake Tesco as the market leader it is not too surprising that the deal will attract the attention of the Competition and Markets Authority (CMA). The competition watchdog have already stated that the merger will “likely be subject to review” but whilst there are obvious concerns regarding the potential power the new combined entity will have, it appears unlikely that the deal will be blocked. A market share in the low 30-percents is a long way from monopolistic and given the intense competition in the sector, aptly highlighted by the emergence of Lidl and Aldi, as well as the fact that the new market share will not be that much more than the one currently enjoyed by the market leader Tesco, the CMA are unlikely to stand in the way and scupper the arrangement.
Glencore (LON:GLEN) drops on DRC problems
The FTSE 100 has made a solid start to the week with Sainsbury’s the clear stand-out performer, providing a boost to the broader index which has risen to a 3-month high. Further weakness in the pound after last week’s declines have boosted internationals with the GBPUSD rate dropping down to the low 1.37s and not far from the early March low. Given this, it is a little surprising that the laggards are some of the stocks which typically benefit from a weaker sterling with Glencore, BP (LON:BP) and Royal Dutch Shell (LON:RDSa) sitting either side of Tesco at the foot of the index - with Tesco seeing an adverse reaction to the Sainsbury’s/Asda news. Glencore’s drop of around 3% can be explained by the latest troubles it has experienced in the Democratic Republic of Congo (DRC) with a freezing order being served on Friday by Dan Gertler, a former business partner, for $3B worth of alleged unpaid royalties.