Walmart to sell U.K. unit Asda

Retailer keeps 42% stake in $10.1B deal, if regulators OK it

A pedestrian passes a Sainsbury’s Local grocery store on Monday in London. With its plan to buy Walmart’s Asda chain, Sainsbury’s aims to create a merged company with $70 billion in U.K. sales.
A pedestrian passes a Sainsbury’s Local grocery store on Monday in London. With its plan to buy Walmart’s Asda chain, Sainsbury’s aims to create a merged company with $70 billion in U.K. sales.

Walmart Inc. took a significant step in reshaping its international business Monday, agreeing to sell its U.K. grocery chain, Asda, to rival Sainsbury's in a deal valued at $10.1 billion.

The proposed deal would combine two of the largest grocery chains in the U.K. market and provide a "transformational opportunity to create a new force," according to Sainsbury's Chief Executive Officer Mike Coupe.

Walmart would relinquish control of roughly 600 Asda locations across the United Kingdom if an arrangement is approved by the U.K.'s Competition and Markets Authority. Walmart would retain a 42 percent stake in a joint venture. Walmart also would receive almost $4.1 billion in cash as part of the merger.

Walmart International Chief Executive Officer Judith McKenna, who moved into the segment's leading role in February, said in a statement Monday the decision is "consistent with the company's strategy of looking for new ways to drive international sales growth." Walmart, which operates about 6,300 international stores, formed a joint venture with JD.com in China in 2016 and with Japan's Rakuten Inc. earlier this year.

Neil Stern, a senior partner with retail consultant firm McMillan-Doolittle, cautioned the tie-up between Asda and Sainsbury's is not a done deal and likely to face intense scrutiny by regulators. But the proposed agreement is a "pretty powerful statement" by Walmart as the retailer shifts its strategy, attempting to increase international sales through partnerships and investments in its digital businesses instead of building stores and taking on competitors alone.

"Asda was the biggest deal they ever made and, by most accounts, it has been OK," Stern said, referencing Walmart's $10.8 billion acquisition in 1999. "So it's a bit of a stunning move to essentially shed a really large, physical asset."

Asda had been Walmart's top revenue-producing international segment the past two decades, but sales growth has stalled in recent years because of the competitive landscape. In addition to battling major supermarket chains like Tesco and Morrisons, Asda lost share to German discounters Aldi and Lidl. Amazon.com has been a competitive force as well.

Asda recorded 11 straight quarters of same-store sales declines dating back to the third quarter of 2015, according to data compiled by Bloomberg Intelligence. The Walmart-owned unit reversed the trend with three straight quarters of growth, but Jennifer Bartashus, a senior analyst with Bloomberg Intelligence, said Asda's performance the last few years has been "difficult."

Bartashus said the merger should position Sainsbury's to compete in the U.K. and shows Walmart's new thinking under CEO Doug McMillon.

"They're really pivoting towards not opening a lot of new stores and they're pursuing partnerships with people that will give them more exposure to markets, but also to make them stronger operators in those markets," Bartashus said. "I think this is a really good example of that strategy."

The merger will create a food company with roughly $70 billion in sales -- about 31 percent of the market share in the U.K. -- and more than 2,800 stores and 330,000 employees. The agreement is expected to give the new organization more leverage with suppliers that could lead to cost savings of at least $688 million, according to the companies. There are no store closures planned as part of the merger.

Sainsbury's and Asda will continue to operate under their current banner with the joint venture headed by Coupe. Asda will remain based in Leeds, England, and led by CEO Roger Burnley.

Walmart will have two representatives on the board of the combined business, but the Bentonville-based retailer will not have more than 29.9 percent of the total voting rights.

Ben Bienvenu, a retail analyst with Stephens Inc., said the move "takes some chips off the table" for Walmart in the U.K. as it restructures an international business that accounted for about a quarter of Walmart's $500.3 billion in sales during fiscal 2018. But Bienvenu said the sale also gives the company some cash and flexibility as it considers other key areas for growth.

"I think to some extent, it's an admission -- and not inconsistent with what they've done elsewhere -- that this asset doesn't fit with our broader strategy of how we envision the future of our company looking," Bienvenu said. "So let's lean out on this business and we'll find some place else to lean in."

McMillon said in February the retailer had "more work" to do on its portfolio, and the North American core (U.S., Mexico and Canada), China and India had become the retailer's biggest priorities in trying to drive sales growth. Some of the company's international plans have become apparent since.

Walmart -- which operates 20 wholesale stores in India -- is in advanced negotiations to grab a majority stake in the country's largest e-commerce company, Flipkart, according to multiple reports. If an agreement is finalized, it would give Walmart a large stake in one of the world's most populated countries as it takes on Amazon.com.

Walmart also is reportedly in talks to sell a controlling stake of its Brazilian business to a private-equity firm, according to the Wall Street Journal. Walmart has struggled to gain traction in Brazil since entering the market in 1995.

Brian Yarbrough, a retail analyst with Edward Jones, said he doesn't believe the proposed merger between Asda and Sainsbury's will be big from a financial standpoint. More importantly, Yarbrough said the proposed tie-up is a sign for investors who have watched international sales growth lag in recent years.

Walmart shares rose $1.17, or 1.3 percent, to close Monday at $88.46.

"I think the willingness for them to do a deal like this, I think, gives investors hope that all options are on the table here," Yarbrough said.

"This continued drumbeat of piling money into international markets where there's little or no growth, those days are probably behind them."

Business on 05/01/2018

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