Shares in Sainsbury's (SBRY) have soared to the top of the FTSE 100 as the supermarket unveiled a sensational swoop on rival Asda that would create the UK's biggest supermarket.
The shares jumped 14.9% to 310p as the supermarket outlined a £7.3 billion deal to buy Asda from US retailer Walmart (WMT.N).
A merger of the UK's second and third largest supermarkets would create Britain's biggest retailer, overtaking rival Tesco (TSCO), whose shares fell 1.4% on the news to 234.8p. Smaller rival Morrisons (MRW) dropped 1.2% to 237.1p.
Under the deal, Sainsbury's will pay £3 billion in cash for Asda, with owner Walmart receiving a 42% stake in the combined business.
'This is a transformational opportunity to create a new force in UK retail, which will be more competitive and give customers more of what they want now and in the future,' said Sainsbury's chief executive Mike Coupe.
'Having worked at Asda before Sainsbury's, I understand the culture and the business well and believe they are the best possible fit.'
The combined business would boast more than 2,800 stores, with Sainsbury's saying it had no plans for closures following the merger.
The supermarket said it expected to deliver £500 million in synergies and that customer prices could fall by 10% should the deal go through.
Tesco's Booker deal emboldens Coupe
Sainsbury's swoop follows the Competition and Markets Authority's surprise waving through of Tesco's deal to buy convenience store operator Booker, a move that analysts said had emboldened Coupe (pictured).
'We are not at all surprised to see further activity in the sector, post the unconditional clearance of the Tesco-Booker deal, clearance for which there is still considerable incredulity in the trade from many suppliers, supermarkets and wholesalers alike,' said Clive Black, analyst at Shore Capital.
'In times gone by we would have quite simply said that the merger of Asda and Sainsbury's cannot conceivably be approved on competition grounds, but we cannot do so anymore and both companies' legal counsel clearly see an opportunity.'
Black downgraded his rating on the shares to 'hold' from 'buy', saying investors should take advantage of today's jump.
'The market often likes mergers and acquisitions and initial excitement drives up share prices of the parties involved,' he said.
'However as we found with Tesco-Booker, the initial euphoria can then lead to inetria as the regulatory process is pursued.'
UBS, which is the lead financial adviser on the transaction, said management had conducted extensive due diligence ahead of an expected CMA investigation.
'It believes the changing definition of the market (to include discounters) and relatively lower overlaps between Sainsbury's and Asda can allow for potential approval without requisite show-stopper remedies,' said analyst Daniel Ekstein.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said Sainsbury's was likely to face tougher scrutiny from the CMA than Tesco, given Booker was not a direct competitor, but added Sainsbury's and Asda's 'complementary regional footprints' could mitigate concerns.
'The competition authorities will also note that the combined supermarket will still only have around the market share of the industry leader, Tesco, in a sector where dominance has been brutally eroded by Aldi and Lidl,' he said.
'If Sainsbury's can demonstrate the merger will create lower prices for customers, that will help too.'
But he questioned Sainsbury's claim that it would avoid store closures. 'We expect the competition authority to take a localised approach to their assessment, as they did with the Tesco takeover of Booker, so store disposals could still be a feature of the merger,' he said.
Others said they saw little chance of the deal gaining approval from the CMA.
'While the Sainsbury's/Asda merger might look good on paper, we see no chance of it getting through the CMA without a major dismemberment of the combined business,' said Charles Hall, analyst at Peel Hunt.
'This will only be possible if there is an acquirer for a significant proportion of the business and Morrisons is the only acquirer that makes sense. This would take the big four down to three, which looks highly unlikely to get through the CMA.'
'Two drunks propping each other up'
Analysts said the planned merger was a defensive move driven by the difficulties encountered by both Sainsbury's and Asda in the UK grocery market in recent years amid the challenge posed by discounters Aldi and Lidl.
'It looks like two organisations that are struggling to compete have decided it is better, or easier, to combine with one-off synergies, than go head to head; the two drunks propping each other up characterisation is hard to strip from the mind,' said Black.
Jefferies analyst James Grzinic said Coupe's 'aggressive move' was likely a direct response to Tesco's merger with Booker.
'The two group's willingness to take on the significant risk of a combination being blocked on competition grounds suggests that Sainsbury's feels very vulnerable in a post Tesco-Booker world [and] Walmart wants out of the UK, as its strategic focus is firmly on its US position in a multichannel future,' he said.
'It also implies that Sainsbury's/Asda are willing to accept very punishing conditions to secure an approval.'
Black also questioned the fit between Sainsbury's and Asda, drawing parallels with the ill-fated acquisition of Homebase by Wesfarmers, owner of the Bunnings chain of Australian DIY stores.
'When it comes to the grocery businesses, well they are chalk and cheese, with considerably different values, range densities, private label characteristics and prices,' he said.
'These differences will impede the potential synergies available to our minds whilst it feels like a cultural fit akin to oil and water; Bunnings and Homebase come to mind.'