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Oh God! Is the Sainsbury’s/Asda merger doomed to fail?

Investor appetite for J Sainsbury (LSE: SBRY) may have picked up on news of potentially-transformative M&A action in the spring, but I’m afraid to say that I still can’t revise my bearish take on the business.

The FTSE 100 supermarket’s share price has ascended almost 40% since the business announced that it was seeking a tie-up with Asda to dethrone Tesco and create Britain’s biggest grocery chain.

The rationale behind the deal was that it would “enable investment in areas that will benefit customers the most: price, quality, range and creating more flexible ways to shop in stores and through digital channels,” with Sainsbury’s predicting that prices on some of the most popular products could fall by around 10%.

The opposition is mobilising

There’s no guarantee, though, that the deal will pass through the scrutiny of the Competition and Markets Authority (CMA) and receive the regulatory sign-off early next year. And opposition to the deal is steadily ramping up, chucking additional mud into the waters.

This week an anonymous supplier to the grocery sector advised that the merger would see the enlarged group, and Tesco, between them control 70% of the market. ‘Supplier B’, as it is simply known, said that the merger would have “significant negative implications and raise material competition issues at all levels of the supply and distribution chain, which ultimately will be extremely detrimental for consumer welfare.” It added that the move could “facilitate collusion” between the new entity and Tesco “ultimately harming consumers.”

The National Union of Farmers has also waded into the argument in recent days. In its own communiqué to the CMA it warned that “continuously squeezing marginal gains from the supply base takes away the value chain’s ability to continuously improve quality, range and ultimately challenges the sustainability of British supply chains. This in our opinion may lead to negative outcomes for consumers.

Sainsbury’s has of course talked up the benefits of the deal to consumers by allowing it to negotiate more effectively with suppliers.

Sales sliding again

Without question, Sainsbury’s needs to do something revolutionary to shake up its operations, the urgency of which was laid bare by fresh industry numbers from Kantar Worldpanel released this week.

These data showed that Sainsbury’s was the worst performing of the country’s so-called Big Four chains during the 12 weeks to November 4, its till rolls falling for the first time since June and slipping 0.6% year-on-year.

But of course there is no guarantee that the merger will give sales the much-needed injection Sainsbury’s so desperately requires given the rampant progress that Aldi and Lidl are making.

As Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel commented: “Five years ago, just under half of British households were visiting one of the discount retailers at least once in a 12 week period. This now stands at almost two-thirds, which is reflected in their continued growth.” Numbers are only likely to keep growing, too, as both of the German discounters embark on their aggressive expansion policies.

Whether or not the planned mega-merger of Sainsbury’s and Asda goes ahead, I believe that the Footsie supermarket’s long-term profits outlook remains murky at best, and this is not reflected by its forward P/E ratio of 15.6 times. I think it’s a share that remains best avoided at the present time.

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Royston Wild has no position in any of the 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.