Walmart's Merger Will Focus Its International Spend
The wide-moat giant will combine Asda Group and Sainsbury, creating the largest grocer in the U.K.
Wide-moat Walmart (WMT) has announced its intent to combine Asda Group (5.3% of consolidated sales) and no-moat Sainsbury for EUR 7.3 billion ($10 billion), creating the largest grocer in the U.K. with a combined market share of nearly 31%--above the 28% held by Tesco-Booker. The deal (slated to close in the second half of calendar 2019) is structured such that Walmart will own 42% of the combined entity (and is unlikely to consolidate its U.K. operations, rather will be accounted for as a minority interest), receiving GBP 3 billion in cash and GBP 4.3 billion worth of shares in the combined entity. We think the likelihood of the deal closing is ultimately high, even though it needs approval from U.K.’s Competition and Markets Authority group. We hope to get more details during the firm’s first-quarter results on May 17, but don't expect to alter our $91 fair value estimate.
In our view, this deal makes strategic sense for Walmart, as the combined business should be poised to more effectively withstand intense competitive pressures (from the hard discounters, other traditional operators, alternative channels such as meal kit providers, and e-commerce distributors including Amazon and Ocado) given the enhanced scale that it will enjoy, which could include exerting more leverage over suppliers. We also view the combination as offering modest diversification from a geographic exposure, given Sainsbury’s customer exposure is tied to the Southern portion of the U.K. region while Asda holds its position in the North, offering the combined firm national reach it didn’t have before. In addition, we believe that the tie-up enables Walmart to focus its investments on higher return opportunities, including building out its presence in more attractive international markets. In this vein, Walmart has been rumoured to be interested in acquiring a stake in Flipkart (India’s largest online retailer) a deal that could top $20 billion, depending on the size of its stake.
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John Brick, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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