By Paul Sandle and Kate Holton
LONDON (Reuters) - Britain's competition regulator has dealt a potentially fatal blow to Sainsbury's planned $9.5 billion takeover of Walmart's Asda, saying it was unlikely the companies would be able to address its "extensive" concerns about the deal.
Shares in Sainsbury's plunged as much as 16 percent on Wednesday after the Competition and Markets Authority (CMA) said its provisional view was the deal should be blocked or require the sale of a large number of stores, or even one of the brands.
"Close to the worst possible outcome (for the companies)," said Bernstein analyst Bruno Monteyne.
Sainsbury's, Britain's second-biggest supermarket group, and number three Asda agreed the deal last April, aiming to overtake market leader Tesco (LON:TSCO). They hope their combined buying power would help them better compete with fast-growing discounters Aldi and Lidl, an enlarged Tesco after its purchase of wholesaler Booker and online retailers like Amazon (NASDAQ:AMZN).
The deal, which would create a company with annual revenue of about 51 billion pounds ($66 billion), more than 2,800 stores and a grocery market share of 31.2 percent, also gave the world's biggest retailer Walmart (NYSE:WMT) a way to exit the British market, one of the weakest performers in its portfolio.
But the CMA said it had "extensive" concerns about the plan as it could lead to a worse experience for in-store and online shoppers through higher prices, a poorer shopping experience and reductions in the range and quality of products offered.
It was "likely to be difficult for the companies to address" those concerns, it said, adding it was also worried prices could rise at a large number of Sainsbury's and Asda petrol stations.
Sainsbury's said it fundamentally disagreed with the findings. "We will fight right the way through the process," its chief executive Mike Coupe said.
At 0850 GMT, Sainsbury's shares were down 13 percent at 250.8 pence. Smaller rival Morrisons, which could benefit from two of its rivals being distracted by a takeover and the exit of Walmart, fell 4 percent, while Tesco's shares were little changed.
MOVING GOALPOSTS
The CMA will now seek responses and submissions from all interested parties ahead of a final report due by April 30.
Bernstein's Monteyne said the provisional findings were likely to lead to a closer focus on Sainsbury's underlying trading performance, which has been weak, and the challenges it would face as a standalone company.
"Enough worries to make the shares nearly uninvestable in the next few months," he said.
The CMA's objections contrast with the relatively easy passage given to Tesco's takeover of Britain's biggest wholesaler Booker, which rivals and some analysts had argued would give Tesco an almost unassailable position in UK retail.
"The CMA has moved the goalposts and its analysis is inconsistent with comparable cases," Sainsbury's said.
"We will be working to understand the rationale behind these findings and will continue to make our case in the coming weeks."
Under the takeover plan, Walmart would receive 3 billion pounds ($3.9 billion) and take a 42 percent stake in the combined business. Walmart has the option of selling down to 29.9 percent after two years and exiting completely after four.
The two groups have said they would lower prices on "everyday items" by around 10 percent, financed by cost savings from big suppliers.
Both companies have declined to say how many forced store disposals would make the deal unattractive, but a source with knowledge of the two firms' thinking has told Reuters a figure "into the hundreds" could scupper it.
UBS, Sainsbury's house broker, has said the deal's economics can absorb at least 132 store disposals and potentially dozens more.