DBRS Comments on Combination of J Sainsbury plc and Walmart Inc.’s Wholly Owned Subsidiary Asda Group Limited

DBRS Limited (DBRS) notes that Walmart Inc. (Walmart or the Company; rated AA with Stable trends by DBRS) and J Sainsbury plc (Sainsbury’s) announced the combination of Walmart’s wholly owned U.K. retail subsidiary, Asda Group Limited (Asda) and Sainsbury’s (together, the Combined Entity). In DBRS’s opinion, the combination does not have a material impact on Walmart’s credit risk profile, due to Asda’s relatively small size in relation to Walmart’s overall operations and the fact that the Company will retain a meaningful stake in the Combined Entity.

Asda’s growth in the United Kingdom has dampened because of intense competition from existing grocers including Tesco PLC (Tesco), the growth of discounters (including Aldi and Lidl Stiftung & Co. KG (Lidl)) and online retailers such as Amazon.com, Inc. (Amazon). DBRS believes the combination could be part of a shift in Walmart’s strategy to dispose of operations or enter into joint ventures in highly competitive or lower growth international markets. Walmart could reinvest the proceeds from such transactions into higher growth opportunities including e-commerce, where Walmart has been pressured by Amazon, both in the United States and in certain international markets. DBRS believes this shift in strategy would happen within the context of the current rating category. DBRS notes that the combination follows Walmart's exit from Germany in 2006, where the Company also struggled against discounters including Lidl and Aldi.

As part of the combination, Walmart would hold a 42% share of the Combined Entity (consisting of 29.9% of Sainsbury’s ordinary shares, with full voting rights, with the balance held as non-voting shares convertible into voting shares), making Walmart the largest shareholder in the Combined Entity. In addition, Walmart would receive approximately $4.1 billion in cash, subject to customary closing adjustments, valuing Asda at approximately $10 billion on a debt-free, cash-free and pension-free basis. The combination is subject to various approvals, including approval from the Competition and Markets Authority, which could face hurdles and extend into the second half of 2019.

Asda generated approximately $30 billion in sales in 2017, accounting for approximately 6% of Walmart’s consolidated revenues as estimated by DBRS. The Combined Entity would create one of the United Kingdom’s leading retailers, rivaling or surpassing current market share leader, Tesco. The Combined Entity is expected to maintain both the Sainsbury’s and Asda brands and is expected to generate approximately $70 billion in sales with 2,800 stores. The Combined Entity plans to lower prices by 10% on many of its products and expects to generate synergies, post price investments, of more than $650 million, largely because of buying benefits, opening Sainsbury’s Argos stores within Asda and operational efficiencies.

Walmart expects to recognize a non-cash loss of approximately $2 billion, which is based on the current value of shares to be received and current foreign exchange rates. This estimate could fluctuate significantly due to changes in the fair value of the equity consideration to be received and changes in currency exchange rates. Because of the uncertain closing date as a result of regulatory approvals, the timing of the loss recognition is not yet determined. Walmart expects the impact to earnings to be slightly dilutive in the first full year following completion of the transaction and neutral to slightly accretive in subsequent years as synergies are realized.

Walmart’s ratings continue to be underpinned by Walmart’s large size, dominant market position, relative resilience to economic cycles, operating efficiency and robust cash-generating ability. DBRS notes that the ratings also continue to consider the highly competitive retail industry, Walmart’s mature and saturated home market as well as risks associated with the Company’s international expansion.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating Companies in the Merchandising Industry, which can be found on dbrs.com under Methodologies.

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