Sainsbury's in merger talks with Asda

Acquisition would form Britain's largest supermarket chain

Sainsbury's, the U.K.'s second-biggest grocery chain, said Saturday it is in advanced discussions about a merger with Walmart Inc.'s British unit, Asda, as retailers adjust to swiftly changing shopping habits.

The combination would create Britain's largest supermarket chain, with more than 30% of the market, putting it ahead of the current leader, Tesco. J Sainsbury plc, the chain's corporate name, released no other information about the potential deal and said it would make another announcement before the London stock market opens Monday.

The move underscores the intense competition in Britain's grocery market as discounters take market share from traditional chains such as Sainsbury's and Tesco. Bentonville, Arkansas-based Walmart, meanwhile, is building fewer big stores and focusing more on internet businesses in an effort to compete for the online shoppers who use the dominant Amazon.

"The merger of Sainsbury's and Asda would be a game-changer in the U.K. grocery market of epic proportions," Retail Economics CEO Richard Lim said.

The merger talks were first reported by Sky News. Sainsbury's later released a statement confirming the negotiations.

Sainsbury's is under pressure to respond after Tesco's 3.7 billion pound (US$5.1 billion) purchase of Booker Group, Britain's biggest grocery wholesaler.

Sainsbury's shares have dropped 2.1% in the past 12 months, compared with a 30% gain for Tesco.

Kantar Worldpanel, a retail research firm, puts Tesco's market share at 27.6%, followed by Sainsbury's at 15.8% and Asda at 15.6%. Nonetheless, all have been squeezed by the rise of lower-cost supermarkets Aldi and Lidl, who between them have a 12.6% grocery market share in Britain.

A combination of two of Britain's biggest supermarket chains would be subject to review by the Competition and Market's Authority. If it decides the new entity would have too much power in the market, the authority could block a deal or force the companies to sell off stores.

The authority in December approved Tesco's takeover of Booker, saying it wouldn't substantially lessen competition.

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