Sainsbury's-Asda deal could live with upwards of 132 store disposals

The proposed merger of Sainsbury's and rival supermarket operator Asda would be viable even if regulators forced the group to dispose of 132 stores or more, Sainsbury's house broker UBS said on Tuesday.

Sainsbury's and Asda, which is owned by Walmart, agreed the 7.3 billion pound deal in April last year and it is currently being probed by Britain's regulator, the Competition and Markets Authority (CMA).

The CMA has said it will publish its preliminary findings by "early February".

Analysts at UBS said that based on disclosures from a recent Competition Appeal Tribunal (CAT) ruling, the CMA's best estimate appears to be the week commencing Feb. 11.

Sainsbury's and Asda have said they expect the CMA to insist on store disposals as a condition for clearing a deal that could allow them to overtake Tesco as Britain's biggest retailer.

"Assuming zero disposal proceeds, merger economics can absorb at least circa 132 remedy stores and potentially dozens more," the UBS analysts said in a note, referring to the number of stores that would have to be sold.

They have a base case of 28-54 remedy stores, rising to 132-161 if discounters Aldi and Lidl are excluded by the CMA's analysis as mainstream competitors.

"Thus, we see scope for deal close even if the CMA adopts a narrow market definition," they said.

Finding buyers for large stores in an industry increasingly moving online and to smaller convenience shops will not be easy.

However, the UBS analysts said they expected the divestiture process to be competitive.
"Tesco is unlikely to have full penetration in remedy areas; and, non-traditional and/or financial buyers could potentially emerge," they said.

Sainsbury's shares were up 2.6 percent at 1436 GMT.

Another note published on Tuesday by Bank of America Merrill Lynch (BoAML) said the economics of the precise stores up for disposal rather than the total number is the critical factor.

"Even a high disposal number would not be a risk to the deal, in our view," said analysts at BAML.

Sainsbury's has about 606 supermarkets, 815 convenience stores and operates 311 petrol filling stations. Asda has about 584 grocery stores and 317 petrol filling stations.