Asda swoops on Netto UK in £778m deal

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Asda stunned the grocery world yesterday by revealing that it had agreed to acquire Netto Foodstores, the UK business of the Danish discount retailer, for £778m.

Analysts expect Asda to follow this with an acquisition of a general merchandise retailer, given that the Walmart-owned supermarket chain plans to leapfrog Tesco as the UK's biggest non-food retailer and become the "clear number two" in food retailing.

The purchase of Netto's 193 UK stores from Denmark's Dansk Supermarked will change the dynamics in the grocery sector by substantially increasing Asda's number of smaller stores and increasing the big four's dominance of the market.

It is the first major transaction by Walmart in Europe since it acquired Asda for £6.7bn in 1999, and reaffirms the long-term commitment of the world's biggest retailer to its UK arm.

Andy Bond, who stepped down to be part-time chairman at Asda this month, said: "Clearly this is a big endorsement of what we have done over the past few years and where we have been going."

Asda will convert all the Netto stores to its own offer and branding by the summer of 2011, consigning Netto to history in the UK after its launch in 1990. Responsibility for the deal will fall to Andy Clarke, who was appointed Asda's chief executive this month.

The Netto stores, which are on average 8,000 sq ft, will be integrated into Asda's recently created division for smaller supermarkets. The average size of an Asda supermarket is around 42,000 sq ft.

Last month, Asda, which has 374 stores, said it would open 250 stores over five years to overtake Tesco in non-food and cement its number two position in food retailing. Speculation then started mounting that it was planning a major acquisition, such as eyeing Home Retail Group, the owner of Argos and Homebase.

Mr Bond declined to comment on any targets or whether a further acquisition would be forthcoming. But he said: "It [Netto] leads on very clearly and strategically from the outline of our five-year plan."

Given the lead that Tesco has in non-food, City analysts expect Asda to also make an acquisition in non-food.

Jonathan Pritchard at Oriel Securities said: "We won't get involved in listing runners and riders in the race for Asda's attention in non-food, but we are pretty convinced that a race exists."

Concerns have also been raised at the £778m price tag paid by Asda for Netto, which only has turnover of about £750m in the UK and estimated profits of £7m. Furthermore, the discounter only delivers sales per square foot of £504, which is "much less than half the big four average", says Mr Pritchard.

Caroline Gulliver, an analyst at Execution Noble, said the acquisition price "looks rich".

Furthermore, Netto has failed to make the impact of rival discounters Aldi and Lidl in the UK and only has a 0.7 per cent market share.

For Asda, which has a 16.8 per cent share of the UK grocery market, the acquisition of Netto will only put a small dent in Tesco's 30.6 per cent share, but will put further daylight between itself and Sainsbury's, which has 16.3 per cent.

In the first quarter of this year, Asda's underlying sales fell by 0.3 per cent – its first drop in like-for-like sales for four years. On Tuesday, 12-week data from Kantar Worldpanel showed that Asda's market share had fallen for the fifth consecutive month.