Walmart to sell majority share of Asda to Sainsbury

Bentonville, Ark.-based Walmart Inc. and J Sainsbury announced on April 30 the “combination” of Sainsbury’s and Asda Group Ltd., Walmart’s wholly owned U.K. retail subsidiary.

“At a time of significant and rapid change in the retail sector, the combination will create one of the U.K.’s leading grocery, general merchandise and clothing retail groups,” Walmart stated in a press release. “Bringing together two distinctive customer propositions will create a more competitive, adaptable and resilient business — better placed to invest in price, quality, range and more flexible ways for customers to shop.”

Under the terms of the combination, which is subject to various approvals, Walmart would hold 42 percent of the combined business’ share capital. This holding will be made up of 29.9 percent of Sainsbury’s ordinary shares, with full voting rights attached, with the balance held as non-voting shares convertible into voting shares.

In addition, Walmart would receive approximately £2.975 billion (U.S. $4.10 billion) in cash, subject to customary closing adjustments, valuing Asda at approximately £7.3 billion (U.S. $10.05 billion) on a debt-free, cash-free and pension-free basis. Walmart would retain the Asda defined benefit pension scheme as part of the combination, along with any ongoing defined benefit pension related obligations.

"We believe the combination offers a unique and exciting opportunity that benefits customers and colleagues,” said Doug McMillon, Walmart’s president and CEO, in a statement. “As a company, we’ve benefited from doing business in the U.K. for many years, and we look forward to working closely with Sainsbury’s to deliver the benefits of the combination."

As a strategic long-term partner, Walmart will share its global retail network and knowledge. The combined business will have enhanced capabilities and a strengthened balance sheet to help deliver value and opportunities for customers, colleagues, suppliers and shareholders of both businesses, Walmart stated.

The new business will operate a distinctive dual brand strategy. Asda would continue to be run from Leeds, U.K., by its own CEO, Roger Burnley, who would join the Group Operating Board of the combined business, ensuring Asda retains its heritage and roots. Key benefits of the combination include the following, according to Walmart:

• Creating one of the U.K.’s leading grocery, general merchandise and clothing retail groups, with combined revenues of £51 billion (U.S. $70.22 billion).
• Enabling investment in areas that will benefit customers the most such as price, quality and range.
• Creating more flexible ways to shop, across Sainsbury’s, Asda and Sainsbury-owned Argos. It is expected that value will be passed on to customers through significant price reductions.
• Maintaining both the Sainsbury’s and Asda brands and enabling them to sharpen their distinct customer propositions and attract new customers.
• Offering more opportunities for more than 330,000 employees at all levels within the larger enterprise.
• Combining a complementary network of more than 2,800 Sainsbury’s, Asda and Argos stores and several of the U.K.’s most visited retail websites to create greater choice for customers through more store formats and channels, with a combined 47 million customer transactions per week.
• Generating net synergies, post price investments, across the enlarged group of at least £500 million (U.S. $688.4 million). These are comprised largely of buying benefits, opening Argos in Asda stores and operational efficiencies. There are no planned Sainsbury’s or Asda store closures as a result of the combination.
• A comprehensive range of channels and formats across supercenters, superstores, supermarkets, convenience stores and digital.

Based on the current deal terms, Walmart expects to recognize a non-cash loss of approximately $2 billion, which is based on the current value of shares to be received and current foreign exchange rates. This estimate could fluctuate significantly due to changes in the fair value of the equity consideration to be received and changes in currency exchange rates.

Due to the conditions to complete the transaction, including regulatory approval which could extend into the second half of calendar year 2019, the timing of the loss recognition is not yet determined. Walmart expects the impact to earnings to be slightly dilutive in the first full year following completion of the transaction and neutral to slightly accretive in subsequent years, as synergies are realized.