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Sainsbury’s share price: can it keep rising on Asda deal?

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Sainsbury’s (LSE: SBRY) share price surged 15% yesterday. In case you missed it, news broke over the weekend that the UK’s second-largest supermarket was in talks with Asda, the UK’s third-largest supermarket, in relation to a potential merger.

Yesterday, Sainsbury’s announced, along with its full-year results, that it had agreed terms with Walmart-owned Asda with regards to a proposed combination of the two companies. The FTSE 100 company stated that the combined business will create a “dynamic new player” in UK retail, and that the enhanced scale and strengthened balance sheet will deliver a “great deal” for shoppers and shareholders of both businesses. It expects to lower prices by around 10% on many of the products that “customers buy regularly.”

Sainsbury’s Chairman David Tyler said that the proposed merger will create “substantial value” for shareholders, while Walmart President and CEO Judith McKenna stated that it will “unlock value for both customers and shareholders.”

Share price rise

Investors were clearly happy with the news, sending Sainsbury’s share price up, well above 300p. The last time the FTSE 100 company traded at current levels was way back in mid-2014. SBRY had been one of the most shorted stocks in the UK heading into the weekend, so the share price spike suggests many shorters have closed their positions.

But can the share price keep rising? Is Sainsbury’s a good share to buy right now?

Game-changer

The last time I covered it, in February, I wasn’t particularly bullish on the investment case. While I stated that the shares looked more attractive than those of rival Tesco, and that the Argos acquisition could help the company’s prospects, I concluded that with the German discounters Aldi and Lidl continuing to aggressively steal market share, the supermarket sector was best left alone.

However, there’s no doubt that yesterday’s news is a game-changer. Assuming the proposed merger isn’t blocked by the Competition and Markets Authority, a combination of the second and third-largest supermarkets would create a powerful entity, with a market share of approximately 31% (vs Tesco at 28%) — the highest in the UK. 

Sainsbury’s estimates it could save £500m through synergies. This would certainly give the company more ammunition in the fight against the German discounters, which have a combined market share of around 13%. It would also help the group fight off competition from Tesco as well as Amazon, which has its eyes on the UK. Integrating Argos stores within Asda stores could work well, in my view.

According to highly-regarded Bernstein analyst Bruno Monteyne, “scale remains the most important factor in food retail profitability.” So the firepower of the combined group would certainly be a plus. Monteyne believes the deal could potentially generate £600m worth of synergies, but that it may take authorities a year to approve.

Worth buying?

In my view, the outlook for Sainsbury’s is certainly more promising after the Asda-merger news. However, personally, I won’t be rushing to buy the shares just yet. There’s still considerable uncertainty over the deal, so I believe it’s worth waiting to see how things play out. After yesterday’s share price rise, the stock now trades on a trailing P/E of 15.5, so, there’s definitely less value on offer than there was recently, when the shares were under 250p. I’ll be keeping SBRY on my watchlist, for now.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.