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Sainsbury’s share price slumps as Asda deal is blocked. This is what I’d do now

J Sainsbury  (LSE: SBRY) was dealt a blow this morning when the Competition and Markets Authority (CMA) announced it had blocked the company’s planned merger with Asda. The shares slumped over 6% in early trading.

Here, I’ll give my view on Sainsbury’s prospects as a standalone business, and whether I’d personally buy, sell, or hold the shares today.

Ups and downs

It was a year ago when Sainsbury’s announced it had agreed a deal with Asda to combine their businesses, subject to regulatory approval. The merger would have created a group that rivalled UK number one Tesco on market share. And it would have enjoyed all the benefits of increased economies of scale.

Sainsbury’s shares climbed strongly following the announcement of the deal, reaching a high of over 340p last summer. I had my doubts at the time whether the CMA would approve the move, or that if it did, whether it would impose a store disposal programme so onerous that the two companies would drop the plan.

The CMA announced its preliminary findings in February. It said a merger “could lead to a substantial lessening of competition,” and added, “it is likely to be difficult for the companies to address the concerns it has identified.” Sainsbury’s shares crashed on the news.

Today’s final CMA report confirmed its preliminary assessment. It said the merger “would lead to increased prices in stores, online and at many petrol stations across the UK… We have concluded that there is no effective way of addressing our concerns, other than to block the merger.”

Sainsbury’s said that, as a result, it and Asda “have mutually agreed to terminate the transaction.”

Anaemic outlook

Having spent the past year explaining why the deal with Asda was so necessary, Sainsbury’s chief executive Mike Coupe is now under pressure to persuade a sceptical market that the company can thrive without the merger. It’s a tall order, in my view. The business has been struggling, and the group’s operating profit margin is the lowest in the sector.

After three consecutive years of dividend cuts, the retailer did at least maintain last year’s payout at the same level as the prior year (despite a further fall in earnings). However, with the 4.7% yield at the current share price (215p) being little better than that available from a FTSE 100 tracker, and the supermarket forecast to produce only anaemic earnings and dividend growth, it seems there’s little potential reward for investors taking on the single-company risk of Sainsbury’s.

Checkout

When it announced its plan to merge with Asda last year, Coupe was caught on camera singing “we’re in the money,” while waiting to be interviewed about the deal for ITV News. As things have turned out, I don’t think he, or investors at today’s share price, will be in the money — at least not to any significantly greater extent than holders of a far less risky FTSE 100 tracker.

Existing Sainsbury’s shareholders may be inclined to continue holding to see if Coupe has a Plan B — or, indeed, if he survives at all.

Personally, on a risk/reward basis, I see this as a situation in which there’s merit in selling the stock, and buying into one with a more promising outlook or a simple FTSE 100 tracker.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.