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April 30, 2018, 3:56 a.m. EDT

Walmart's Asda to merge with rival Sainsbury's

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By Saabira Chaudhuri

LONDON -- Walmart Inc. on Monday said it would sell its British arm Asda Group Ltd. to rival J Sainsbury PLC, a deal that values the chain at about $7.3 billion ($10.1 billion) and, if successful, would create the U.K.'s largest grocer.

Walmart will hold a 42% stake in the combined company and get almost GBP3 billion in cash. The Bentonville, Ark. company will have voting rights up to 29.9%.

If cleared by antitrust regulators, the move would clear the path for a new grocery behemoth that would help both companies better compete against a resurgent Tesco PLC, Amazon.com Inc. -- which has been pushing further into online groceries -- and increasingly popular discounters Aldi and Lidl.

For Walmart the move is part of a broader shift to form joint ventures in competitive markets and focus investments in areas executives think will provide growth. It is also in talks to sell its controlling stake in its Brazilian operations and in advanced discussions to buy a majority stake in Flipkart Group, a homegrown startup that has become India's largest e-commerce company.

Stiff competition and large numbers of online shoppers means the U.K. grocery market is billed by many retail executives as the world's toughest. In response, the U.K.'s market leaders have been moving to bulk up with Tesco last month acquiring Booker Group PLC, the country's largest food wholesaler, for GBP3.7 billion, becoming the U.K.'s largest food business.

Sainsburys, whose shares rose about 20% in early trading Monday, said the combined company would have total sales of around GBP51 billion and more than 2,800 stores. It also said the new business would lower prices by about 10% on "many" everyday products.

Despite this, the proposed deal will likely draw major antitrust scrutiny amid worries that consolidation could give the combined entity greater power to maintain or raise prices for food. Analysts on Monday cited the deal's high regulatory risk noting that it will be a lengthy process.

Sainsbury buying Asda "would represent a remarkable step-up in U.K. industry consolidation, if cleared," said Jefferies analyst James Grzinic, adding that the two companies "are willing to accept very punishing conditions to secure an approval."

The combined company would have a value of about GBP12 billion, according to Bernstein analysts, while its grocery market share would be 27% according to Kantar.

It is expected to add at least GBP500 million to earnings before interest, taxes, depreciation and amortization as the companies benefit from bulk buying and the opening of Argos businesses in Asda stores. Sainsbury bought Argos owner Home Retail Group in 2016 for GBP1.4 billion.

The companies plan to keep both the Sainsbury and Asda brands, which have different market positions, the latter being more upmarket. It will be led by Sainsbury's chairman and chief executive, while Asda's CEO will join the board of the combined business. Two Walmart executives will also join the board. Sainsbury said it doesn't expect to close any of its stores or any Asda stores as a result of the deal.

For the year to March 10, Sainsbury reported profit fell 18% to GBP309 million weighed down by one-time costs although underlying pretax profit climbed 1.4%. Revenue including fuel but excluding value-added-tax climbed to GBP28.46 billion from GBP26.22 billion.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

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