Leigh Himsworth, the Citywire AA-rated manager of Fidelity UK Opportunities, has sold his ‘significant’ position in Sainsbury’s (SBRY) following its deal with Asda, which he believes will benefit competitors in the short term.
Sainsbury’s made up 3% of the £122 million portfolio at 29 April until Himsworth disposed the holding after the supermarket announced a £7.3 billion deal to buy Walmart-owned Asda (WMT.N).
He said a ‘quick glance’ at the tie-up made ‘compelling reading’ thanks to the £500 million of buying synergies the merged group would have, opportunities for staff, 10% price cuts on regular items, and ‘double-digit earnings accretion’.
However, the fact that the second largest supermarket is buying the third largest would stir competition concerns.
‘[The deal] would take Sainsbury’s and Asda to a number one market position with a market share of 31.4%, clearly giving the Competition and Markets Authority (CMA) an issue,’ he said.
‘In theory, the issues to be determined are whether such a step would disadvantage the customer and stile investment.’
Himsworth said he backs the idea of the brands, along with Sainsbury’s-owned Argos, ‘getting together as there will be massive buying benefits and rationalisation that may well work’ but the timeline for completion is too long.
‘The deal will take at least until the end of 2019 to clear, and will involve a large chunk of management time,’ he said.
He said management could well be focused on the deal, which would work to the benefit of competitors, as could any store disposals that are demanded by the CMA.
‘It is for this reason that into the announcement I sold the entire position in Sainsbury’s and will watch for the side-lines for, perhaps, a better re-entry point - perhaps buy-one-get-one free.’
The merger of Sainsbury’s and Asda is indicative of the fierce competition within food retail, with the big four supermarkets struggling in recent years to battle the threats from Waitrose’s quality offering, Ocado’s (OCDO) home delivery, and the deep discounting offers from Lidl and Aldi, not to mention the growing threat from Amazon.
‘The changing nature of food retailing means that while commentators only really discussed the ‘big four’ some years ago, the discussion now, rightly includes Waitrose, Marks & Spencer, Ocado, Aldi, and Lidl, the latter two with a combined market share of 12.7% - in excess of Morrisons (MRW) at 10.5%,’ said Himsworth (pictured).
Himsworth starting running Fidelity UK Opportunities in February 2014. Under him the fund has given investors a total of 42.5% over three years, beating the 25.7% average return of funds in its Investment Association UK All Companies sector. Over five years the has generated a total return of 88.9% against the sector average of 56.1%.