Sainsbury's shares dive on CMA findings - opportunity?

Friday, 22nd February 2019 13:04 - by Shant

Sainsbury's shares dive on CMA findings - opportunity? by Shant Movsesian

Shares in Sainsbury's plunged this week as merger plans with Asda were dealt a devastating blow by the CMA (Competition and Markets Authority).  The CMA issued a report refuting suggestions that the merger would lead to lower prices for the consumer, stating that it could 'push up prices and reduce quality.  Summarily, the CMA believes the merger could lead to decreased competition at both national and local levels to the detriment of said consumers. Sainsbury's had argued that the new group could make substantial cost savings which could be passed onto shoppers and by their own calculations, to the tune of 10%. 

As such, the objections of the CMA have been welcomed elsewhere, namely by suppliers of the two major supermarkets, who combined, comprise a little over 30% of the market share.  Grocery suppliers feared the combined group would demand increased discounts on the terms of trade based on higher volumes, squeezing wholesalers at a time when there are grave concerns over the impact of Brexit.  Brexit related costs over stockpiling as well as putting contingency plans in place have already eaten into profits, and this would have been an added risk on baseline profits going forward.  

Along with Sainsbury's, Walmart - who owns Asda - has also been left disappointed by the findings of the CMA, which by most analysts' accounts, now leaves the deal dead in the water.  Walmart purchased Asda in 1999 for $10.8 billion with the proposed sale to Sainsbury's closer to the $9.5 billion mark.  Walmart declined to add to the joint statement led by Sainsbury's boss Coupe who suggested the CMA had moved the goalpost. Fuelled by the merger of Tesco and Bookers last year, the Sainsburys CEO seemed certain he could pass the deal through, and was even caught on television singing 'we're in the money' ahead of an interview on prime time!

So where does this leave Sainsbury's, and indeed the rest of the major players in the supermarket business?  We saw a knock-on effect on share price on Tesco's and Morrisons, with the latter losing over 6% compared to a more modest 2.5% in Tesco's.  The musings of the CMA may have a greater influence on sentiment on the industry as a whole, just as investors are searching for safer avenues in what is undeniably a challenging market.  Will this now feed through into fears over whether the big names can prosper under their own steam, effectively contained by regulation which is naturally aimed at keeping prices in check for the consumer?  

We have seen a similar impact in the energy sector this week when Centrica shares nose-dived on profit warnings over price cap imposed by Ofgem at the start of the year.  Prices of the British Gas owner fell to fresh not seen since the middle of 1999, and again highlight the crippling effects (on outlook, and therefore valuation) of regulation.  A sign of the time perhaps?  

Sainsbury's share price started the week at a little under £2.90, collapsing to a just below £2.30 before stabilising.  These levels are not too far of those which have held since the summer of 2016, prior to which we saw an all-time low at £2.13 earlier that year.  Based on the view that staples continue to provide a better option in the current climate, it is perhaps not a bad time to dust off one of the well-established memes in trading (and investment).  Distressed stocks offer (or can offer) opportunities.  At a time when global (and domestic) demand is at its most fragile, necessities such as food, medicine (pharmaceuticals) and energy represent a more reliable source of revenue and by simple correlation, viability.  

While the above episodes may have thrown up yet more risks and obstruction for investors to consider - in this case regulation - instances such as the above may offer possible opportunities in what many believe is a bear market.  Sizeable adjustments in price can represent an opportunity to find value to offset against the broader market.  The volatility in Sterling makes the outlook for the FTSE indices ever more uncertain over current Brexit-focused period, so one may look to diversify on a geographical basis, ie the S&P, NASDAQ etc.  Sainsbury's is unlikely to go under, especially if the CMA is looking to maintain healthy competition in the market.  There is always more than one side to a story.  

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.