Leadership2 publishers3 min readPublished
Sainsbury's explored a Morrisons merger that would still have trailed Tesco
Sainsbury's held exploratory talks this year on a Morrisons merger that would have created a grocer with 23.6% of the UK market, the FT and Sky reported. Any revival would turn on whether the competition regulator accepted store sales as the price of approval.
The Board Room · Leadership desk
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What happened
- The two grocers are believed to be no longer in live discussions, and neither would comment on the reports.
- Sky reported that Clayton Dubilier & Rice is open to a tie-up with another major supermarket, and that TDR Capital-owned Asda could be drawn in.
- The competition regulator blocked the £7bn Asda-Sainsbury's merger in 2019 over lost competition and higher prices for shoppers.
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Why it matters
- decision Sainsbury's board has to choose between reopening talks now and accepting the risk that Asda, also private-equity owned, becomes Morrisons' partner instead.
- constraint Food inflation adds a political test to the CMA's competition test for any deal that cuts the big four grocers to three.
- cost Each quarter Morrisons loses ground to discounters weakens CD&R's position on price, so the cost of waiting falls mostly on the seller.
The reporting is firmest on Morrisons' condition. Clayton Dubilier & Rice bought the grocer, once one of the big four, in 2021 [3]. The deal loaded it with more than £7bn of debt, and it has since struggled to grow as fast as its rivals [4]. Lidl overtook it in market share this year [5]. The merger figures put Morrisons at roughly 8.4% of the market: the combined 23.6% [6] less Sainsbury's own 15.2% [12], assuming both numbers cover the same period [16]. On the day the talks were reported, Lidl GB said revenue rose 10% to more than £13bn and pre-tax profit rose 30% to £245.5m in the year to February [14].
The talks themselves prove less. According to the Financial Times and Sky, the two companies held exploratory negotiations over a multibillion-pound deal [1]. The reports do not say which side made the approach or why the discussions stopped, and both companies declined to comment [15]. The owner's stance is clearer. I think a private-equity owner carrying more than £7bn of debt [4] has a strong reason to want a trade buyer. Sky reported that CD&R is open to combining Morrisons with another major supermarket, and that Asda, majority owned by TDR Capital, could also be drawn into talks [10].
This year Sainsbury's has narrowed toward food. In the summer it agreed to sell Argos for £120m to concentrate on its core grocery business, a decade after paying more than £1bn for the chain [13]. Its shares are down 3% this year while Tesco's are up 6% [11]. A Morrisons deal would fit that narrowing. It would still leave the combined group at 23.6% against Tesco's 27.8%, according to Worldpanel by Numerator [6]. The gap would be 4.2 points [17].
A skeptic would say the regulator answered this in 2019, when the CMA blocked the £7bn Asda-Sainsbury's merger on the grounds that it would cut competition and raise prices [7]. The reporting points to a narrower answer. The CMA would almost certainly have reviewed a Sainsbury's-Morrisons deal and could have required Sainsbury's to sell stores to win approval [8]. On that reading the question is how many stores, and where. Lidl's move past Morrisons [5] is the first exhibit I would expect a merging party to offer as proof that the market has changed since 2019. We do not know yet whether the CMA would accept it. Persistent food inflation for millions of households also makes any loss of grocery competition politically sensitive [9].
Nothing is forced this week; the talks are believed to be over [2]. The decision for Sainsbury's board runs on a slower clock. If it stays out while CD&R is open to offers [10], the next big-four combination it meets may be a rival's, with Sainsbury's arguing as a competitor in the review. If it goes back in, the first figure it has to price is the store list the CMA could demand [8].
What to watch
- Any approach by TDR Capital's Asda to Clayton Dubilier & Rice over Morrisons, as Sky reported was possible.
- A formal bid for Morrisons from any grocer, and the CMA's first word on whether store sales could clear it.
- Morrisons' next accounts, for the size of its debt and whether its share keeps slipping against Lidl's.