Sainsbury Takes $60 Million Hit on Asda Deal 

(Bloomberg) --

J Sainsbury Plc got some breathing space from better-than-expected profit after the collapse of a 7.3 billion-pound ($9.5 billion) deal to acquire Walmart Inc.'s Asda.

The grocer's shares rose as much as 6.4 percent as the company laid out its Plan B for fighting the U.K.'s supermarket wars alone. Sainsbury said it will invest in improving its stores, where standards slipped as the company was distracted by its unsuccessful effort to secure antitrust regulators' backing for the Asda deal.

For now, Chief Executive Officer Mike Coupe is clinging to his job, even though he had described the merger as key to the company's future. The CEO is planning to stay in the role for the long term and has the support of the board and shareholders, he said on a call with journalists.

Sainsbury was counting on greater scale to cut prices by 1 billion pounds and help it compete with market leader Tesco Plc and German discounters Aldi and Lidl, as Amazon.com Inc. and online grocer Ocado Group Plc make inroads in the food business.

Sainsbury Rises as ‘Doomsday' Scenarios Avoided: Street Wrap

Without Asda, cutting prices “becomes a little bit more challenging -- there's no doubt in that and it's something we're going to have to deal with,” Chief Financial Officer Kevin O'Byrne said in an interview with Bloomberg Television. “We could have done more for customers faster. It will just take a little longer now.”

Sainsbury said the failed deal cost it 46 million pounds in fees, but underlying retail earnings were up 11 percent for the year on an operating basis. Comparable sales excluding fuel fell 0.2 percent, though Sainsbury got a boost from its recently acquired Argos housewares business.

Bears Thwarted

The “bears did not get what they wanted,” said Bruno Monteyne, an analyst at Sanford C. Bernstein. “This is clearly a message of defiance from Mike Coupe. He is saying, ‘We are right, our strategy is working and we will continue in this direction.'”

While Sainsbury shares have lost a quarter of their value over the past year, gains Wednesday were fueled by the disclosure that both Coupe and O'Byrne had made new purchases.

Sainsbury pledged a 550 million-pound investment aimed at sprucing up its stores and building its digital business. The supermarkets have faced criticism for declining standards and product shortages. The company said it will also cut prices to become more competitive on core products, but didn't say how much that would cost.

Sainsbury, which has a roughly 15 percent share of the U.K. grocery business, said it will make improvements at more than 400 supermarkets this year. It's also integrating them with Argos stores to generate synergies.

Over the past year, Sainsbury has already revamped its supermarket staffing and streamlined management as it responds to the challenge posed by the discounters. Rival Tesco is closing fresh-food counters at some of its stores and has introduced a cut-price store brand.

“There's no silver bullets that are suddenly going to pop out of the hat,” Coupe said. “This is the kind of market and business where lots of small, incremental changes week in and week out make a difference over the medium to long term, and that's what we're focused on doing.”

--With assistance from Manus Cranny.

To contact the reporters on this story: Deirdre Hipwell in London at dhipwell@bloomberg.net;Ellen Milligan in London at emilligan11@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, John J. Edwards III

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