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MarketPulse Europe - Sainsbury's Asda Deal Crushed by Regulator

By Geoffrey Smith

Investing.com -- The U.K. grocery business retail is tough: the margins are thin and the pressure from discounters such as Germany’s Lidl and Aldi – to say nothing of online disruptors – is relentless.

J Sainsbury (LON:SBRY) had looked to shore up its position by buying Walmart's (NYSE:WMT) U.K. subsidiary Asda, a move that would have combined the second- and third-largest players in the market and overtaken Tesco (LON:TSCO) as the biggest player in the sector, with a market share of over 31%.

However, the deal is in tatters this morning after the Competition and Markets Authority said in a preliminary review that it’s inclined to block the sale.

Normally, if antitrust watchdogs are concerned by mergers, they can order the parties involved to sell a package of assets to competitors, but today the CMA said it’s struggling to find a way to do even this.

Sainsbury’s shares are cratering as a result – they’re down 15% and on course for their worst one-day drop in 11 years. But they’re not the only victims. Rival WM Morrison (LON:MRW) is also down 4.9%, as its chances of snapping up some decent assets cheaply evaporate. Tesco also fell initially but was up 0.3% by 0500 AM ET (1000 GMT). While the CMA wouldn’t have let Tesco buy any of Sainsbury-Asda’s castaways, its might have benefited from consolidation in the sector.

This is, of course, why the CMA blocked it: bureaucrats aren’t going to get any points from their political masters by letting food retailers pad their margins just as a hard Brexit threatens to create shortages of fresh imported food.

For comparison, the broader U.K. FTSE 100 index is up 0.1% after early trading, with big buyback programs from Lloyds (LON:LLOY) Bank and miner Glencore (LON:GLEN) lifting the mood. The benchmark Euro Stoxx 600, meanwhile, is up 0.2% at 369.62.

Curiously, the one company that may not suffer too much is Walmart (NYSE:WMT). Although investors will be disappointed that it won’t after all make a quick, clean exit from a struggling market, they’ll be much more focused on the stellar results that it posted from its core U.S. business on Tuesday.

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