It is hard to disagree with the ruling by the Competition and Markets Authority, which drove the final nail into the coffin of J Sainsbury’s proposed merger with its supermarket rival Asda. Allowing the enlarged group to control 30% of the grocery market (and 60% between it and Tesco) would most likely have led to less choice and higher prices for consumers.
If the competition watchdog had not stepped in to block this kind of consolidation of power, you might reasonably have asked what it was for. The CMA had already given a controversial green light to Tesco’s takeover of Booker. This would have been a step too far.
Sainsbury’s disagrees, of course. It argues that it would have cut prices by a combined £1bn on the back of post-merger cost-savings. And it would have gladly sold off a swathe of supermarkets to get the deal through. But that’s all academic now. The deal is dead.
The impact on investors in early deals this morning has been relatively muted. The shares fell about 5% to 214p. But that follows a much more significant correction in recent weeks since it became obvious that the merger was in trouble.
Last year Sainsbury’s stock spiked higher to 340p on hopes that a tie-up with Asda could paper over the cracks of an increasingly competitive grocery market. Last year’s gains had already been handed back by the time this morning’s announcement hit the wires.
At today’s depressed price, the shares have fallen back to levels reached in the late 1980s when supermarkets were stock market darlings. Back then, investors welcomed the out-of-town expansion that transformed our weekly shopping habits. Today that all seems as out of date as padded shoulders, big hair and Duran Duran.
So what lessons can investors take from today’s Sainsbury Shocker?
- The first for me, is captured by that long-term share price chart which peaked in the mid-1990s and has been in decline pretty much ever since. Investors are collectively good at predicting the future. Markets are not wholly efficient, but they do spot trends a lot sooner than newspaper headlines. That’s worth bearing in mind if you are thinking about investing in the latest hot theme - ask whether it’s already been priced in.
- The second lesson is around looking for what’s really going on. When Sainsbury’s and Asda announced their planned merger last year, the share price soared in anticipation of big cost-savings and higher profits. That was a reasonable response, but it would also have been sensible to ask why the two companies felt the need to pool their resources. What was this telling us about the health of the grocery market in the UK?
We all know about the growth of the German discounters, Aldi and Lidl, which have captured the hearts and minds of newly-frugal middle-class shoppers. The people who would previously have turned their noses up at the cheap and cheerful newcomers on the supermarket scene are now relaxed about being seen snapping up bargains. There’s no shame in bagging decent wine at a good price. Aldi’s steaks are excellent too, by the way.
Sainsbury’s margins have been heading the wrong way for a couple of years now as all the supermarkets engage in a race to the bottom. ‘Promotional’ is the industry euphemism. It’s great for consumers but bad news for shareholders.
- The third lesson focuses on portfolio management. Sainsbury’s shares have lost half their value in the past five years. That’s clearly a disaster if Sainsbury’s is all you hold, but a minor irritation if the supermarket chain’s shares are just a small part of a well-diversified portfolio. Spinning through the top ten holdings of the nine UK-focused funds on the Select 50, Sainsbury’s does not appear once.
No doubt the company appears in one or more of these portfolios, but it is not a significant holding. The Majedie UK Equity Fund, for example, holds both Tesco and Wm Morrison in its top 10 but not Sainsbury’s. For all these leading investors, then, Sainsbury’s problems are at worst a small drag on performance.
- The final lesson from today’s news is the need to look deeper than the headline numbers. A superficial look at the investment fundamentals of Sainsbury’s might lead you to think that the shares are pretty attractive at today’s depressed level. According to the company’s fact-sheet on our share dealing website, the shares yield 4.3%. That’s seemingly attractive in a low-interest-rate environment but it won’t be enough to support the shares unless investors are convinced by the company’s plan to bounce back from this setback.
Hopefully, we will have more to go on this time next week. That’s because Sainsbury’s is due to announce full year results on 1 May. Chastened boss Mike Coupe will need to be on top of his game.
More on today’s J Sainsbury news
Five year performance
As at 24 April
Past performance is not a reliable indicator of future returns
Source: Fe, as at 24.4.19, in GBP terms with income reinvested
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.