By Oliver Griffin
J Sainsbury PLC (SBRY.LN) said Monday that it has agreed to merge with Walmart Inc.'s /zigman2/quotes/207374728/composite WMT +1.47% U.K. operating arm, Asda Group Ltd., to create an enlarged business with combined revenue of around GBP51 billion ($68.9 billion) in 2017.
The U.K. supermarket said that Walmart will hold 42% of the combined business and will receive GBP2.98 billion as part of the deal, valuing Asda at around GBP7.3 billion. When the deal is complete, Walmart won't hold more than 29.9% of the total voting rights for the combined business, Sainsbury said.
Walmart operates about 600 Asda stores in the U.K., the company's biggest overseas market by revenue. It acquired Asda in 1999 for $10.8 billion--its biggest ever acquisition--as part of Walmart's goal at the time to double its international operations.
Sainsbury said that the deal is expected to generate Ebitda synergies of at least GBP500 million, comprised largely of buying benefits and operational efficiencies. The supermarket said that there were no planned store closures as part of the merger.
After the merger, the combined Sainsbury-Asda business will leapfrog Tesco PLC (TSCO.LN) to become the U.K.'s largest supermarket by market share, according to the latest data from Kantar Worldpanel. According to the market surveyor, Tesco holds a market share of 27.6%, but the new combined business will hold a market share of 31.9%.
Analysts at Bernstein said that a valuable merger will swing on the businesses' ability to convince the U.K. monopoly watchdog, the Competition and Markets Authority, to include smaller discounter stores within its local competition rules parameters. If the CMA sticks to its old rules, the grocers might be forced to dispose up to 15% of stores and if the business has to give up 13% or more of its stores, the deal will no longer add value, Bernstein said.