There are too many uncertainties hanging over Sainsbury's proposed acquisition of Asda to justify the price and Tesco is a better bet, JP Morgan analysts said.
Sainsbury's agreed purchase of Asda from Walmart, comprising £3bn cash plus shares, could be a good deal for both sides, the analysts said. But, after Sainsbury's shares
rose 15% following the announcement, the price assumes the deal is low-risk when it isn't, they said.
The assumptions include:
The deal gets regulatory clearance
The combined company will not be forced to dispose of stores
Management executes the deal with no mistakes
Management achieves the target of £500m synergies by 2022
There is no certainty the Competition & Markets Authority will approve the deal and if the CMA requires store disposals there are no obvious takers, JP Morgan said.
Timing is also an uncertainty because a full CMA inquiry could take 15-18 months, according to the analysts, who kept their 'underweight' rating for Sainsbury's and increased their price target to 260p a share from 200p.
Tesco, whose takeover of Booker has been approved by the CMA, is a better bet for investors, JP Morgan said.
"We would rather buy Tesco, where there is no CMA risk, there is a new addressable market/avenue of growth and the combined businesses are in better shape."
Taking a more bullish view of the deal, Bank of America Merrill Lynch rebooted its coverage of Sainsbury with a 'buy' rating as analysts said the £500m target for deal synergies as credible, leading to earnings per share improvements of at least 40% the third year after.
"We believe announcement of the Asda deal will erode the long-term discount Sainsbury has faced versus the market as it is taken more seriously as a competitor willing to take action for survival," Merrill said, sticking a 350p price target on the shares.
Based on forecast 2019 earnings, Sainsbury's shares are changing hands for a 4.4% discount to the sector average on a standalone basis, while a blue sky scenario assuming £230m synergies by 2021 would mean the shares are trading for just 10.9 times 2021 earnings, versus peers at 13.4 times.
At 1600 BST, Sainsbury's shares were up 1.5% to 313.50p and Tesco was down 0.5% to 234.80p.