March 28, 2007
Can Wal-Mart Get Into Sainsbury Bidding?
It hasn’t been for a lack of trying that Wal-Mart has been unable to unseat Tesco at the top of the U.K. retailing heap. Despite the best efforts of its Asda division, Wal-Mart has had to settle with being among the many that trail Sir Terry Leahy and company.
It is because of its second rung ranking in the U.K. that it could be seen as inevitable that Asda would be among those rumored to be interested in bidding for J Sainsbury, the third largest supermarket chain in Britain.
According to a report by The Daily Telegraph, Asda is “on the verge of contacting the competition authorities” to determine how much resistance it would face should it make a bid for the chain.
While most dismiss the prospects of the antitrust regulators giving the go-ahead for a bid, some believe that Tesco’s dominance in the market might open an opportunity for Asda to go after Sainsbury.
It has been widely reported that Sainsbury is considering an offer of £9.5 billion from a private equity consortium led by CVC Capital Partners and including Kohlberg Kravis Roberts, Blackstone Group and Texas Pacific.
CVC and its partners are believed to be negotiating with Sainsbury’s pension fund trustees as the last hurdle to closing the deal.
Discussion questions: How likely is it that antitrust regulators in the U.K. will give Wal-Mart the okay to make a bid for Sainsbury? Do you see any benefit to Sainsbury being acquired by Wal-Mart/Asda versus the consortium led by CVC Capital Partners?
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All hell would break loose if the competition authorities gave Asda permission to bid. They are already getting flack for the extremely restrictive enquiries they are conducting into supermarket practices and the large shares that some (Tesco) have and the ways in which they may or may not be reducing choice for consumers. The alleged aim of the investigations is to ensure that there are no unfair practices. As many question whether this will be achieved or not, allowing Asda to buy Sainsbury’s and reduce the number of supermarket chains further is definitely a step too far.
RetailVeteran’s hypothesis that Asda will just buy some of the stores once a private equity consortium wins the bid is much more likely. There is a great deal of speculation that the winning bidder will sell off the stores as quickly as possible; this would cost Asda less and give them more, without having to fight accusations of being anti-competitive.
George also has a good point–Robert Tchenguiz seems to be perpetually successful at making money. Whether he is buying shares in Sainsbury’s just to be one of the winning shareholders, or is actually planning to try and buy the company, remains to be seen. If it is the former, then he is probably doing an extremely good job of pushing the price up and making himself an even bigger profit without the hassle of having to deal with whatever he has purchased if he makes a winning bid.
I don’t think Wal-Mart would have a really difficult time from an antitrust perspective. Competition is rich today and it is very hard, in the retail environment, to make a strong case that various combinations will be bad for the consumer. Ease of entry into the market, the presence of many players who could enter the market and the ease with which customers can shift from one retailer to another all suggest that Wal-Mart would not face serious problems. Now, if Wal-Mart continues rolling out its worldwide growth plans, the story could be quite different 10 or 15 years from now.
The biggest issue from the competition authorities point of view is what impact a deal that would bring Asda and Sainsbury would have on smaller grocer operating in the U.K. I think the debacle that resulted from the Wm. Morrisons/Safeway merger should give the authorities some degree of confidence that a small grocer wrecking machine is not guaranteed with a coming together of Asda and Sainsbury.
Most still seem to think it’s unlikely that there will be any outcome other than CVC’s group winning the bidding. The possible snag there appears to be in whether it can comes to terms with the pension fund.
Finally, the wild card in all the wheeling and dealing here is Robert Tchenguiz and his 4.51 percent and apparently growing stake in Sainsbury.
There is some validity to the view that Tesco is so strong that an Asda acquisition of J Sainsbury is not as anti-competition as one might think. That said, the likelihood is the CVC group will win the day on this one. In turn, it may sell some Sainsbury locations to Asda if it means a profitable return on part of the consortium’s investment.
Asda/Wal-Mart should bid for Sainsbury if they can get it for a reasonable (low) price. They have little to lose by asking the anti-trust authorities for permission. But it’s not worth paying so much for the company that return on investment declines. Furthermore, why shouldn’t Wal-Mart test the auction waters by putting Asda up for sale? More money is made buying and selling retailers than operating retailers. Ask Ron Burkle.
I’m not familiar enough with U.K. antitrust law to comment. As to which is better, better for whom? If it’s shareholders–best looks like the highest bidder. If it’s better for customers I’d be inclined to give Asda the nod. No question that Wal-Mart revolutionized high street pricing, ending years of excessive margins.
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All hell would break loose if the competition authorities gave Asda permission to bid. They are already getting flack for the extremely restrictive enquiries they are conducting into supermarket practices and the large shares that some (Tesco) have and the ways in which they may or may not be reducing choice for consumers. The alleged aim of the investigations is to ensure that there are no unfair practices. As many question whether this will be achieved or not, allowing Asda to buy Sainsbury’s and reduce the number of supermarket chains further is definitely a step too far.
RetailVeteran’s hypothesis that Asda will just buy some of the stores once a private equity consortium wins the bid is much more likely. There is a great deal of speculation that the winning bidder will sell off the stores as quickly as possible; this would cost Asda less and give them more, without having to fight accusations of being anti-competitive.
George also has a good point–Robert Tchenguiz seems to be perpetually successful at making money. Whether he is buying shares in Sainsbury’s just to be one of the winning shareholders, or is actually planning to try and buy the company, remains to be seen. If it is the former, then he is probably doing an extremely good job of pushing the price up and making himself an even bigger profit without the hassle of having to deal with whatever he has purchased if he makes a winning bid.
I don’t think Wal-Mart would have a really difficult time from an antitrust perspective. Competition is rich today and it is very hard, in the retail environment, to make a strong case that various combinations will be bad for the consumer. Ease of entry into the market, the presence of many players who could enter the market and the ease with which customers can shift from one retailer to another all suggest that Wal-Mart would not face serious problems. Now, if Wal-Mart continues rolling out its worldwide growth plans, the story could be quite different 10 or 15 years from now.
The biggest issue from the competition authorities point of view is what impact a deal that would bring Asda and Sainsbury would have on smaller grocer operating in the U.K. I think the debacle that resulted from the Wm. Morrisons/Safeway merger should give the authorities some degree of confidence that a small grocer wrecking machine is not guaranteed with a coming together of Asda and Sainsbury.
Most still seem to think it’s unlikely that there will be any outcome other than CVC’s group winning the bidding. The possible snag there appears to be in whether it can comes to terms with the pension fund.
Finally, the wild card in all the wheeling and dealing here is Robert Tchenguiz and his 4.51 percent and apparently growing stake in Sainsbury.
There is some validity to the view that Tesco is so strong that an Asda acquisition of J Sainsbury is not as anti-competition as one might think. That said, the likelihood is the CVC group will win the day on this one. In turn, it may sell some Sainsbury locations to Asda if it means a profitable return on part of the consortium’s investment.
Asda/Wal-Mart should bid for Sainsbury if they can get it for a reasonable (low) price. They have little to lose by asking the anti-trust authorities for permission. But it’s not worth paying so much for the company that return on investment declines. Furthermore, why shouldn’t Wal-Mart test the auction waters by putting Asda up for sale? More money is made buying and selling retailers than operating retailers. Ask Ron Burkle.
I’m not familiar enough with U.K. antitrust law to comment. As to which is better, better for whom? If it’s shareholders–best looks like the highest bidder. If it’s better for customers I’d be inclined to give Asda the nod. No question that Wal-Mart revolutionized high street pricing, ending years of excessive margins.