Sainsbury’s CEO Mike Coupe is set to take control of the enlarged group

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Sainsbury’s (SBRY) and Asda have promised “a great deal for customers, colleagues, suppliers and shareholders of both businesses” as the two confirmed a mega-merger worth to create a £51bn retail giant.

Sainsbury’s and Asda’s owner, Walmart (WMT), said the combined business would create a dynamic new player in UK retail with an outstanding breadth of products, delivered through multiple channels and it would deliver about a 10% reduction in the prices of many goods shoppers bought regularly.

The combined business would be chaired by Sainsbury’s chairman and led by the Sainsbury’s chief executive and chief finance officer. Asda would continue to be run from Leeds with its own chief executive, who would join the group operating board of the combined business. The best leaders from both businesses would run the new entity.

Read more: Sainsbury’s & Asda mega merger - what we know and what it means

The retail sector was going through significant and rapid change, as customer shopping habits continued to evolve, the statement said. This had led to increased competition across grocery, general merchandise and clothing, as customers sought ever greater value, choice and convenience.

Bringing Sainsbury’s and Asda together would result in a more competitive and more resilient business that would be better able to invest in price, quality, range and the technology to create more flexible ways for customers to shop, the statement said.

The combination of both businesses would give Walmart a 42% stake in the enlarged entity. It would receive £2.97bn cash, subject to customary completion adjustments, valuing Asda at about £7.3bn on a debt-free, cash-free and pension-free basis.

At the time of completion, Walmart would not hold more than 29.9% cent of the total voting rights.

The statement said the combination of both businesses would, among other things:

  • · Create one of the UK’s leading grocery, general merchandise and clothing retail groups, with combined revenues £51bn for 2017
  • · Maintain both the Sainsbury’s and Asda brands and enable them to sharpen their distinctive customer propositions and attract new customers
  • · Combine a complementary network of more than 2,800 Sainsbury’s, Asda and Argos stores and several of the UK’s most visited retail websites, to create greater choice for customers through more store formats and channels, with a combined 47m customer transactions each week
  • · Enable investment in areas that would benefit customers the most: price, quality, range and creating more flexible ways to shop in stores and through digital channels, across Sainsbury’s, Asda and Argos.
  • · Lower prices by about 10% on many of the products customers bought regularly
  • · Generate net EBITDA synergies, post investments in price, across the enlarged group of at least £500m. These synergies were comprised largely of buying benefits, opening Argos in Asda stores and operational efficiencies. There were no planned Sainsbury’s or Asda store closures as a result of the combination
  • · Deliver benefits to the combined business through a close relationship with Walmart, both as a strategic partner and long-term shareholder, allowing the business to share knowledge and technology developments between Walmart, Sainsbury’s and Asda
  • · Offer more opportunities for more than 330,000 staff at all levels within the enlarged group, drawing on the shared values and heritage of both businesses.

David Tyler, Chairman of Sainsbury’s, said: “We believe that the combination of Sainsbury’s and Asda will create substantial value for our shareholders and will be excellent news for our customers and our colleagues.

“As one of the largest employers in the country, the combined business will become an even greater contributor to the British economy. The proposal will bring together two of the most experienced and talented management teams in retail at a time when the industry is undergoing rapid change. We welcome Walmart as a significant shareholder and look forward to working closely with them.”

Mike Coupe, chief executive of Sainsbury’s, said called it “a transformational opportunity” to create a new force in UK retail, which would be more competitive and give customers more of what they wanted.

“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, he said he understood the culture and the businesses well and believed they were the best possible fit.

“This creates a great deal for customers, colleagues, suppliers and shareholders and I am excited about the opportunities ahead and what we can achieve together,” he said.

Judith McKenna, president and chief executive of Walmart International, said the proposed merger represented “a unique and bold opportunity”, consistent with the US group’s strategy of looking for new ways to drive international growth.

“Asda became part of Walmart nearly 20 years ago, and it is a great business and an important part of our portfolio, acting as a source of best practices, new ideas and talent for Walmart businesses around the world.

“We believe this combination will create a dynamic new retail player better positioned for even more success in a fast-changing and competitive UK market. It will unlock value for both customers and shareholders, but, at the same time, it’s the colleagues at Asda who make the difference, and this merger will provide them with broader opportunities within the retail group. We are very much looking forward to working closely with Sainsbury’s to deliver the benefits of the combined business.”

Roger Burnley, president and chief executive of Asda, said: “The combination of Asda and Sainsbury’s into a single retailing group will be great news for Asda customers, allowing us to deliver even lower prices in store and even greater choice.”

Asda would continue to be Asda, but by coming together with Sainsbury’s, supported by Walmart, it could further accelerate its existing strategy and make its offer even more compelling and competitive.

“From my six years with Asda and 10 years with Sainsbury’s, I know first-hand that both organisations are fortunate to employ some of the most talented and customer-focused colleagues in this market and I am excited by the opportunity of the two coming together,” he said.

The announcement included an update on Asda’s current trading. It delivered its fourth consecutive quarter of positive like-for-like sales growth as its offer continued to resonate with customers, in the first three months of the year.

Asda’s disciplined focus on Every Day Low Cost enabled it to return to profit growth in the first quarter. In the financial year to 31 December 2017, Asda saw a 2.6% per cent growth in estimated sales to about £22.2bn and a return to positive like-for-like growth for the full year –driven by a return to volume growth in own label grocery and fresh food, supported by price and quality investments.

Asda also experienced strong growth in online, both groceries and clothing, driven by improvements in customer proposition and customer experience.

Investments in price and overall customer proposition led to a planned reduction in operating margin for the year to the end of December. This resulted in Asda operating profit of about £720m (2016: £845m). Free cash flow generation continued to be strong in 2017.

Morning update

Read The Grocer’s first take on the tie-up here as we analyse what the deal would mean for the wider industry and whether it stands a chance of gaining competition clearance? 

In light of this morning’s seismic announcement of the proposed combination of Sainsbury’s and Asda, Sainsbury’s announced results for the year to 10 March, which had previously been scheduled for Wednesday.

Pre-tax profit fell from £503m to £409m on group revenue, excluding VAT and including fuel, up from £26.2bn to £28.5bn. Total group sales including VAT and fuel climbed 9% from £29.1bn to £31.7bn.

Group like-for-like sales including Vat and excluding fuel, climbed 1.3%. Underlying profit before tax climbed 1.4% from £581m to £589m.

Sainsbury’s reduced net debt by £113m to £1.4bn and it was aiming to reduce net debt by a further £100m in 2018/19.

It delivered £185m cost savings in the year, bringing the total to £540m over three years, exceeding its original £500m three-year target.

The business said it would deliver further cost savings of at least £500m over the next three years to 2020/21, starting with £200m in savings this year.

Highlights included convenience sales up nearly 8% and groceries online sales up nearly 7%.

Some 191 Argos stores opened in Sainsbury’s supermarkets, resulting in about 280 by the end of 2018/19, ahead of the plan to open 250 by March 2019. It would also deliver £160m EBITDA synergies by March 2019, six months ahead of plan.

The company said it had begun looking for a non-executive chairman to succeed David Tyler, who has been chairman for more than eight years.

Mike Coupe, group chief executive, said: “We have accelerated the rate of change and innovation across the group and more customers are choosing to shop with us than ever before as a result. I am pleased to announce an increase in underlying profits before tax to £589m, driven by delivery of Argos synergies, efficiency savings across the group and improving food margin trends.

“We are focused on making Sainsbury’s a destination of choice. We are clearly differentiated by the quality of our food and we have recently invested a further £150m to lower prices. General Merchandise and Clothing were both performing ahead of the market and, in response to great customer feedback and financial returns, the group was opening Argos stores in its supermarkets faster than it originally planned. We will also deliver £160 million EBITDA synergies by March 2019, six months ahead of plan.

“Sainsbury’s Bank profits grew as we fully consolidated Argos Financial Services during the year. Looking to the year ahead, we expect lending margins to remain under pressure in a competitive market. Combined with new accounting standards and interest payments on the external capital we raised in November, we expect Bank profits to reduce significantly next year. We have decided to limit capital injections in the Bank to £110m in 2018/19. We will take a cautious approach to unsecured lending while maintaining focus on mortgage growth.

“Our acquisition of Nectar supports our strategy of knowing our customers better than anyone else and I was pleased to welcome our Nectar colleagues to the group in February.”

Sainsbury’s continued to find ways to simplify its business and reduce costs, Coupe added.

Colgate-Palmolive Company (NYSE:CL) reported worldwide net sales of $4bn in first quarter 2018, an increase of 6.5% versus first quarter 2017. Global unit volume increased 2%, pricing was even with the year ago period and foreign exchange was positive 4.5%.

The previously disclosed professional skin care acquisitions contributed 0.5% to unit volume growth. Organic sales increased 1.5%. Net income was $634m. Operating profit increased to $983m in the first quarter compared with $912m in first quarter of 2017.

Ian Cook, chairman, president and chief executive, said: “The first quarter was a challenging one as category growth remained soft in many markets around the world. While net sales grew 6.5%, organic sales grew 1.5%, below our expectations, due to flat unit volume growth in emerging markets. In developed markets, unit volume grew 4.5% and organic volume grew 3.0%, led by strong volume growth in North America and Europe. Encouragingly, worldwide pricing improved sequentially versus fourth quarter 2017.

“Advertising investment increased in absolute dollars versus first quarter 2017 and we continue to plan for increased advertising investment, both absolutely and as a percent to sales, for the full year in support of new products, our base businesses and longer-term consumption-building activities.

“Operating profit, net income and diluted earnings per share all increased versus the year ago period.

“Colgate’s leadership of the global toothpaste market continued during the quarter with our global market share at 42.4% year to date. Our global leadership in manual toothbrushes also continued with Colgate’s global market share in that category at 32.5% year to date.”

On the markets this morning, the FTSE 100 climbed 0.3% to 7,526.5pts.

Sainsbury’s (SBRY) shares rocketed by a fifth – 20.4% to 324.8p in early trading.

However, worries of the impact of a combined Sainsbury’s and Asda have hit shares elsewhere in the sector. Tesco (TSCO) is off 3.5% at 229.8p and Morrisons (MRW) has started the day down 3% at 232.9p.

The potential impact on suppliers has seen Premier Foods (PFD) fall 1.8% to 37.3p.

Other risers include Finsbury Food Group (FIF) managed a more modest 1.1% fillip at 130p, Devro (DVO), 2.3% at 220p and Fevertree Drinks (FEVR), 0.7% at 2,797.1p. Greencore Group (GNC) is down 2.3% to 157p.

This week in the City

This morning brought Sainsbury’s full-year results, brought forward from Wednesday, in light of today’s momentous news. Asda also released a trading update. Tuesday will see Carlsberg (CARLB) issue its first-quarter trading statement along with Mondelez (NASDAQ MDLZ). DS Smith (SMDS) is scheduled for a trading announcement and Just Eat (JE) will publish its interims. The manufacturing PMI will also be announced as will the BRC Shop Price Index.

Wednesday brings first-quarter figures from Kraft Heinz (KHC), Molson Coors Brewing (TAP) and Monster Beverage Corporation ( MNST). Ocado (OCDO) and Unilever (ULVR) will hold their AGMs

Thursday brings B&G Foods (BGS) first-quarter results and GlaxoSmithKline (GSK) and Reckitt Benckiser Group (RB) hold their AGMs.

Friday sees Smurfit Kappa Group (SKG) provide a first- quarter trading update.