WHO WOULD HAVE THUNK IT? ASDA-BURYS!

Over the weekend I was as shocked as everybody else to hear that Sainsburys and Asda were in advanced negotiations to merge and create a new retailing empire worth £10billion. OMG! The schoolground bully that has reigned supreme and unchallenged for so long, must be worrying this morning after hearing the weekend news. In fact, the only thing that will seem to save Tesco now will be the Competition Watchdog and the Takeover for Panels and Mergers. If they think that competition will be reduced then it won’t pass. However, as I write this article at 805am on Monday 30th April, Sainsburys is trading up 20%! So, whatever happens there will be plenty of fun and games ahead over the coming days and plenty of money to be made, provided that you have the stomach for the volatility. For me personally these are the events that as investors we should be jumping on. They don’t come around very often and as long as you have a good strategy with sensible risk mitigation in place, it can be the difference between having a great year in the stock market or an average year. That’s why I like it. Asda is currently owned by the US retail giant, Walmart, and so the merger (if it goes ahead) will bring truly global ownership into the UK retail market. And remember that Amazon is also now selling food online so that is going to shake things up even further. Of course, there will be pros and cons to this merger depending on which side of the fence you are sitting on. As an employee of either Asda or Sainsburys then you will be fearful of your job because undoubtedly there will be job cuts and store closures. The joint merger will mean a combined total of 2,800 stores and that’s not great for employees because some stores will shut and even the ones that remain there will be a duplication of some roles and positions, particularly at head office and managerial level. The good news however is that the new company, to be called ‘Asdaburys’ (just kidding!) will have a total market share of around 32% this would just put them ahead of Tesco. If you are Aldi or Lidl you will also have your concerns. In recent years they you have running rampage in the retail market and taking big swathes of the UK food market share (between them they have grown a not inconsiderable 80% over the past 5 years) and that growth is now going to be put at serious risk. That’s because by joining forces, Asda and Sainsbury could potentially negotiate much better prices from their suppliers and in turn that could lead to a fall in prices as the new giant fights for even greater market share. From a consumer point of view the merger could therefore definitely be a good thing in terms of pricing. Both companies have already stated that they hope to reduce prices by as much as 10% but that could also be just a sales ploy to help strengthen their case to the Competition Watchdog. Who knows what might happen if the deal goes ahead? Certainly, they would have the capability to reduce pricing if they wanted to. Let’s see if that actually happens. The frightening thing is that if the merger goes ahead then more than 60% of the entire food retail space will be dominated by just 3 companies, Tesco, Asda and Sainsbury. And remember that this news will also be very negative for other retailers such as Morrison so expect prices to fall in any food retailers outside of this small circle. There is a lot of uncertainty but one thing is for sure which is that there will be fireworks in the days ahead. The question now is “are you in or are you out?” Are you going to be a spectator or a participator? If you are in like I am, then there are 3 tips that I would like to share with you: Number one – make your decision and stick to it, indecision kills – it’s like crossing the road. Once you start walking it’s not a good idea to turn around and head back especially if you are more than half way across. Number two – Act quickly on early information. Don’t be the one reading the newspaper or watching the ITV News and taking action the next day. News will be quick and fast and you need to act before others do. You don’t need to be the first in the queue but make sure that you are not last. Number three – don’t forget to exit. This trade only works if you get your money and get the hell out of there because sometimes these deals have a tendency of blowing up. Even if it gets agreed by the watchdog and regulatory authorities that doesn’t mean that the shares will go up. If you can make 20% for a few days’ work then don’t be greedy. Take it and leave a little something on the table for the next person. Sharing is caring, after all.