Walmart's new $10 billion dollar deal is facing a big roadblock
- Walmart announced it will merge its UK business, Asda, with J Sainsbury in a deal worth approximately $10 billion.
- The combined supermarkets will beat out industry giant Tesco to become the largest food retailer in the UK with about 26% market share, Jefferies says.
- The deal is attractive but Jefferies worries there will be regulatory challenges ahead.
- Watch Walmart trade in real-time here.
Walmart announced it will sell its UK business, Asda, to J Sainsbury in a £7.3 billion ($10 billion) deal. The combined company would beat out Tesco to become the largest food retailer in the UK with more than 25% of market share, but regulatory challenges may get in the way, Jefferies analyst Daniel Binder warned in a note.
The Asda/Sainsbury combination is "strategically attractive if a deal can get approval," he wrote. A lenghty review process is expected given the deal is between the market's second- and third- largest companies, and may not be approved until the second half of next year, if at all, according to Binder. He sees the two companies benefiting as the merger will lower buying and overhead costs and provide an opportunity to make use of Walmart's technology.
As Walmart reshapes its international portfolio, the deal will help reduce losses to the retail giant, he wrote. Competition has been heating up and over the last two years, the company saw close to a 24% decline in operating profit in the UK.
"The bigger picture for WMT international is getting better," Binder wrote. He says Walmart has spent the last four years selling assets, partnering with local companies and closing stores around the world to focus on markets with higher return.
The announced merger is a continuation of a market consolidation trend in the food retail industry as margins get tighter and competition ramps up. With the recent addition of Amazon in the market through last summer's Whole Foods acquisition, the industry has been in a constant battle to win customers by slashing prices. Even Costco seems to be taking a hit as the value-driven warehouse store announced in an earnings call in March that it would be shifting some of the cost burden to its suppliers to provide lower prices for customers.
Walmart shares are down 9.8% this year.
