Sainsbury's and Morrisons have held merger talks, according to reports, but the deal is not a must-do for Sainsbury's. The two companies initiated the discussions, which have now been aborted, presumably believing the Competition and Markets Authority (CMA) would approve a combination.
Arguments for approval
The duo could argue that their combined market share would still be less than Tesco's. Sainsbury's holds 15.2% of the market, Morrisons 8.4%, while Tesco leads with 27.8%, according to Worldpanel analysts. This would not be a case of leap-frogging the market leader, which was Sainsbury's ambition in 2018 when it targeted Asda.
Aldi and Lidl are also a stronger force, together representing almost a fifth of the UK market. Their international buying muscle means their role as the country's grocery price police might not be affected.
Regulatory hurdles
Morrisons has already sold its petrol stations, removing fuel from the CMA's concerns. Sainsbury's and Morrisons could also argue that UK food security would improve if Morrisons' 18 food-processing factories were housed within a stronger company.
However, the CMA would presumably conduct a site-by-site analysis of drive-times to judge local competition. The regulatory instinct would likely err on the side of intervention, given that half the trade would be in the hands of just two companies.
Sainsbury's position
Sainsbury's chief executive, Simon Roberts, may not want to spend a year bogged down in regulatory back-and-forth. In the Asda episode, the effort consumed his predecessor's reign.
Sainsbury's is not struggling today. It is winning market share, profit margins are stable, and it has solved the strategic headaches of its bank and Argos by selling both.
Morrisons' perspective
At private equity-owned Morrisons, the calculation is different. Five years after buying the chain for £7bn, owners Clayton, Dubilier & Rice are considering how to exit a tricky investment. A disposal would look easier than a stock market flotation, and Sainsbury's is the obvious candidate.
Sainsbury's walked away from the talks, as reported by the FT. It can afford to do nothing or wait for terms to improve. This is not a must-do deal for Sainsbury's.
