LONDON - J Sainsbury and Walmart are throwing down the gauntlet to Britain’s competition authorities. The UK’s second-largest grocer by market share announced on Saturday it was in advanced talks to merge with slightly smaller rival Asda, which is owned by the U.S. retail giant. Joining forces is a logical response to the threats posed by Amazon and market leader Tesco's recent tie-up with wholesaler Booker. But success depends on breaking old merger taboos.

Financial details of the merger, which is due to be announced on Monday, are still hazy. Shareholders in the 5.9 billon pound Sainsbury will own the majority of the new group according to a person close to the talks, while Walmart will be the junior partner. For the $258 billion group, it’s a partial retreat from the United Kingdom almost two decades after it bought Asda.

The combined group would be a UK behemoth with combined sales of around 50 billion pounds. Sainsbury turned over 28.3 billion pounds in its most recent financial year, according to forecasts compiled by Eikon, while Asda reported revenue of 21 billion pounds for 2016, the most recent year for which detailed financial statements are available. The pair would control 27 percent of the UK grocery market based on Kantar data for 2017, surpassing Tesco. Barring large disposals, the deal would place more than half of the UK food market in the hands of just two players.

That kind of combination has long been considered inconceivable. However, UK supermarkets are under intense pressure. Fierce competition from German discounters Lidl and Aldi has forced larger groups to keep prices down. Amazon’s push into online grocery sales, underscored by last year’s purchase of Whole Foods, further tilts the landscape.

The growing number of people who buy their groceries online makes the UK Competition and Markets Authority’s traditional focus on overlapping stores to preserve choice for consumers looks rusty. The CMA’s decision earlier this year to allow Tesco’s 4 billion pound takeover of Booker has emboldened other audacious tie-ups.

Sainsbury and Asda will doubtless argue that the financial savings from the combination will allow them to lower prices. However, the deal is bound to face vociferous opposition from food producers, consumers, trade unions, and local politicians worried about supermarket closures. It will test regulators’ rules to the limit.

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CONTEXT NEWS

- J Sainsbury, Britain’s second-largest grocer by market share, said on April 28 that it is in advanced talks with Walmart about a combination with the U.S. retail giant’s British subsidiary, Asda. The company will make a further announcement on April 30.

- The combination would create a group worth over 10 billion pounds, sources told Reuters. The merged company would retain the Sainsbury’s name, with Asda stores continuing to trade under their existing banner.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Peter Thal Larsen and Martin Langfield)

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