Two of Britain’s four largest supermarket groups sat down to discuss a multi-billion-pound merger, and then one of them got up and left. No bid was tabled, no price was disclosed, and the only reason anybody knows it happened is that somebody in the room told somebody outside it.
Sainsbury’s and Morrisons held talks over a potential tie-up, and the talks did not proceed. The background is that Morrisons carries a substantial debt load from its leveraged buyout, and its US private equity owners have been looking for a way out for some time. A merger with Sainsbury’s would have been that way out, and it would also have created a grocery business of a scale the UK has not previously permitted.
The permission is the whole story. Anyone evaluating a combination of this kind in British food retail has to begin with the memory of the last attempt by one of these companies to merge with a peer, which was blocked by the competition authority on grounds of consumer harm. That precedent has not aged or softened. It sits in the file. Which means the executives in this room were not primarily negotiating with each other. They were negotiating with the Competition and Markets Authority in absentia, running the overlap analysis town by town, working out how many stores would have to be sold and to whom, and arriving at a number that made the industrial logic disappear.
The espresso version of this is the blend you can taste in your head. Every serious roaster has sat with two components, a bright washed Ethiopian and a heavy natural Brazilian, and known with complete confidence what the combination would do in a milk drink and in a straight shot. Sometimes you do not pull it. You already know the bright one will fight the body, you know the body will flatten the acidity, and you have done the work without ever dirtying a cup. Walking away is not a failure of the blend. It is the blending.
What the coverage treated as a non-event is in fact the most informative thing to happen in UK grocery this month, because it reveals what the incumbents now believe they are facing. Companies of this size do not hold merger talks out of curiosity. They hold them when the standalone plan has begun to look thin, and the standalone plan in British supermarkets is being squeezed from both ends at once, by German discounters taking share at the bottom and by online and convenience economics eating the margin at the top. Scale is the traditional answer to that squeeze. The talks establish that both parties looked at the traditional answer and found it unavailable.
That leaves a more interesting field than a merger would have. Morrisons’ owners still need an exit, and the exit is now more likely to come in pieces, through property, through regional disposals, through a wholesale arrangement, or through a buyer whose overlap with Morrisons’ store estate is small enough to clear. Sainsbury’s, having tested the boundary and found it solid, has usefully confirmed that its future is a matter of execution rather than consolidation, which is a harder discipline but an entirely workable one.
There is also a quiet win for the competition regime here, and it deserves stating. A regulator is working well when it stops a deal before the deal is proposed, because the deterrent has become part of the arithmetic rather than a battle fought in public at great expense. The CMA did not have to say a word.
Two multi-billion-pound companies sat in a room, did the sums and discovered the regulator had already done them.
Source: The Guardian, “Sainsbury’s and Morrisons held talks over a possible merger”