Walmart's Asda and Sainsbury's announce UK merger deal - BUSINESS PLAN MONTPELLIER UNLIMITED

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A man puts a shopping bag into a car outside a Sainsbury’s store in London

U.K. food retail is set for a massive shake up as J Sainsbury and Asda plan to merge, creating a new giant for the supermarket sector.

J Sainsbury and Walmart’s Asda are joining forces in a deal worth £15 billion ($20.67 billion), they confirmed on Monday morning.

If approved by regulators, it will surpass Tesco which is the largest retailer in the U.K. with 25 percent of market share. The two companies merging are the second and the third largest retailers, currently.

Given the size of the two companies, regulators will have to assess whether their merger would not create market disruptions.

According to Bruno Monteyne, European food retail analyst at Bernstein, "scale remains the most important factor in food retail profitability."

There have been several recent mergers in the food industry across Europe, in an attempt to fight increased competition from e-commerce firms, including Amazon. "The power of purchasing has been a driver behind several recent deals within the industry," Monteyne also said in a note Monday.

The two grocers have struggled with their sales growth, which has weighed on their ability to get cheaper deals with suppliers.

"We expect the process for the CMA (Competition Markets Authority) to take one year and to be swiftly approved, if the CMA gives clearance with limited disposals. We think the risk of higher disposals is high and a non-negligible risk of outright rejection of the deal," Monteyne also said in the note.

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