Shares in Sainsbury's (SBRY) have tumbled after the competition watchdog warned of its 'extensive' concerns about the supermarket's planned merger with Asda.
The shares fell 14.1% to 247.2p as the Competition and Markets Authority (CMA) said the deal 'could lead to a worse experience for in-store and online shoppers across the UK through higher prices, a poorer shopping experience, and reductions in the range and quality of products offered'.
Sainsbury's issued an angry response to the CMA's findings, saying the watchdog had 'misunderstood how people shop in the UK today and the intensity of competition in the grocery market'.
'The CMA has moved the goalposts and its analysis is inconsistent with comparable cases,' it added.
'We are surprised that the CMA would choose to reject the opportunity to put money directly into customers' pockets, particularly at this time of economic uncertainty.'
Shore Capital analyst Clive Black slapped a 'sell' rating on Sainsbury's shares on the news, down from his previous 'hold' recommendation, arguing the merger 'looks to have suffered a mortal blow'.
'We stated repeatedly that we could not predict the CMA and today we see why,' he added.
'For Sainsbury's we see this as a major blow and one that removed the merger premium and so we downgrade to "sell", noting its laggard status in British supermarketing.'
Jefferies analyst James Grzinic cut his price target from 285p to 230p, saying he now was now assuming an 80% chance of the deal being blocked following the CMA's findings.
The analyst argued the collapse of a deal would leave Sainsbury's shares in a perilous position, with the departure of chief executive Mike Coupe a 'near inveitability'.
'In recent weeks we outlined the extent to which growing market share attrition by Tesco (TSCO) at the expense of Sainsbury had emerged as a worrying trend,' he said.
'The lack of merger and acquisitions support would likely see these stand-alone concerns result in a pressured valuation profile.
'Relative like-for-like underperformance and an uncertain strategic direction are unlikely to enable much of a valuation backstop.'
A number of fund managers have been alert to the prospect of the Sainsbury's merger with Asda collapsing.
Clive Beagles and James Lowen, Citywire A-rated managers of the £3.3 billion JOHCM UK Equity Income fund, in September warned of the risks to Sainsbury's should the deal collapse. They began trimming their position and had sold out entirely by October.
'The merger will take a long time to complete and is not without risk, so we decided to exit the position,' he said at the time. The manager sold his stake held in the Allianz UK Equity Income fund in May.
Tony Yarrow, Citywire AA-rated manager of the Wise Multi-Asset Income fund, halved his position in Sainsbury's to lock in profits as the shares rallied on the day the merger plans were announced, and sold the rest of his shares in July.
'We think the risks are more skewed to the downside given the uncertainty related to the approval and the timeframe of the actual deal,' he said at the time.
Shares in Morrisons (MRW) have also taken a hit this morning, falling 4.7% as investors priced in the likelihood of the deal collapsing. The rival supermarket had been seen as the prime candidate to take on the raft of stores Sainsbury's and Asda were expected to offload under the conditions of a merger.
Grzinic said investors were pricing in the seeming block to Asda owner Walmart's (WMT.N) exit from the UK grocery market.
He argued a private equity buyer for Asda, which would not face the same competition issues as Sainsbury's, was now likely to emerge.
'Change of ownership along these lines would represent a structural positive for the UK grocery market, and particularly Morrisons, which locally has a significant number of overlaps with Asda,' he said.