UBS maintained a ‘buy’ rating on Sainsbury’s and raised its target price to 435p from 400p, citing the synergies expected to arise from the supermarket chain’s proposed Asda merger.
J Sainsbury PLC (LON:SBRY) would be able to absorb at least 132 store closures to get its deal to buy Walmart Inc’s Asda approved by the UK’s Competition Markets Authority, UBS said.
The CMA launched an in-depth second phase investigation into the proposed £7.3mln merger amid concerns it could reduce competition in the sector.
READ: Does Sainsbury’s need Asda more than Asda needs Sainsbury’s?
An initial probe by the regulator last September found a “realistic prospect of a significant lessening of competition” in 463 places in the UK where the two supermarkets overlapped.
To remedy these worries, Sainsbury’s and Asda are expected to agree to close some of its supermarkets.
“Assuming zero disposal proceeds, merger economics can absorb at least circa 132 remedy stores and potentially dozens more (given flexiblity in gross-to-net price investment), whilst still achieving targeted return on invested capital of more than 10%,” UBS said.
UBS said it has heard some market estimates of 200 to 300 store closures but such numbers would “appear to challenge both the economics and rationale of the merger”.
UBS sees scope for deal to close
The broker added that it sees scope for the deal to close even if the CMA adopts a narrow market definition.
The tie-up would create the UK’s biggest supermarket by market share, taking over the number one spot from Tesco. The combined group would have nearly 3,000 stores and annual sales of more than £50bn.
“We do expect some competitive tension in the remedy process, noting SASDA (Sainsbury’s/Asda) stores generate circa £3.4mln/annum EBIT contribution; Tesco is unlikely to have full penetration in remedy areas; and, non-traditional and/or financial buyers could potentially emerge,” UBS said.
Sainsbury’s shares expected to rally unless CMA blocks merger
UBS maintained a ‘buy’ rating on Sainsbury’s and raised its target price to 435p from 400p, citing the synergies expected to arise from the deal.
The investment bank said the shares trade 15% above standalone fair value of 240p per share and thinks they are likely to rally given the positive skew of outcomes from the CMA’s investigation unless the regulator decides to block the deal completely.
Shares rose 2.6% to 286.4p in morning trading.