Exploratory talks, no live deal

Sainsbury's and Morrisons discussed a potential multibillion-pound combination in merger talks held this year, according to press reports. The Financial Times and Sky both reported that the negotiations were exploratory, and reports framed the potential deal as the biggest shake-up of UK supermarkets in decades. Those discussions are, however, believed to be no longer live.

Shares in Sainsbury's, listed on the London Stock Exchange, were flat on Monday afternoon. The stock is down 3% so far this year, while its FTSE 100 rival Tesco has risen 6%.

The market share arithmetic

Sainsbury's is the UK's second biggest grocer by market share, at 15.2%, and employs about 140,000 people. Morrisons previously ranked among the big four UK grocers, alongside Sainsbury's, Tesco and Asda.

• •A combined Sainsbury's and Morrisons business would have held a 23.6% market share
• •Tesco, Britain's biggest retailer, is on 27.8% of the market, according to analysts at Worldpanel by Numerator

Over the summer, Sainsbury's agreed a £120m sale of Argos so it could concentrate on its core food business, a decade after buying the retail chain for more than £1bn.

Morrisons since the 2021 buyout

Clayton Dubilier & Rice, a US private equity firm, bought Morrisons in 2021, leaving the grocer with more than £7bn of debt on its balance sheet. Morrisons has since struggled to grow as fast as its rivals, and this year the German discounter Lidl overtook it in UK market share.

On Monday, Lidl GB reported annual revenue up 10%, to more than £13bn. Pre-tax profits at the discounter's British arm rose 30% to £245.5m in the year that ended in February. Lidl said British shoppers had sought out cheaper fresh meat, fruit and vegetables, as well as its Deluxe upmarket food range.

The 2019 precedent and the regulatory hurdle

In 2019, Asda and Sainsbury's came close to combining in the previous attempt to merge two of the big four supermarkets. The Competition and Markets Authority blocked that £7bn deal, citing a loss of competition and higher prices for customers.

A Sainsbury's-Morrisons combination would almost certainly have been reviewed by the Competition and Markets Authority, which could have demanded store sales from Sainsbury's as a condition of approving any deal. Reduced grocery competition could also prove politically sensitive, because millions of households have been grappling with persistent food inflation in recent years.

Sainsbury's and Morrisons declined to comment on the reported talks, though Sky reported that Clayton Dubilier & Rice is open to a tie-up between Morrisons and another major supermarket, and that Asda, majority owned by the private equity firm TDR Capital, could also be drawn into deal talks.