LONDON - J Sainsbury’s proposed 7.3 billion pound takeover of Walmart-owned Asda has been shelved but UK supermarket mergers may well resurface in the future - in the bargain bin.

Britain’s competition watchdog on Thursday blocked the plan to create the country’s largest grocer, citing concerns that the deal would push up supermarket and petrol prices for shoppers. That’s a blow for Chief Executive Mike Coupe who had presented the deal as a way for Sainsbury’s to cope with rising competition.

Over the past two years, the company’s share of UK grocery sales has fallen from 16.1 percent to 15.3 percent, according to Kantar data, and it is now in third place behind Tesco and Asda. Tesco, which has muscled its way to the top of the Kantar league table for market shares, has launched cheaper offerings, such as “Exclusively at Tesco”, which Goldman Sachs analysts reckon are around 10 percent cheaper than comparable goods at German discounter Lidl. Morrisons has also cut prices on a range of products to keep customers from jumping ship to Lidl and its peer Aldi. Sainsbury’s has yet to unveil a similar offering.

A 6 percent decline in Sainsbury’s share on Thursday increases pressure on Coupe to be more creative. One option is to trim relatively generous dividends and use the cash to launch a discount offering. The grocer’s dividend yield of 4 percent compares with Morrison’s 3 percent and Tesco’s 2.3 percent, according to data from Refinitiv. Coupe could also scale back on capital investments, which Jefferies estimates will amount to a total of nearly 2 billion pounds in the next three years.

Either option would hurt Sainsbury’s share price. If the declines are steep enough, the grocer could eventually become a takeover target. Asda is also in play. True, its U.S. owner is in no rush to offload the business. But if competition pressures increase and Asda loses market share, private equity may be able to scoop it up at a cheaper price than Sainsbury’s was willing to pay. The competition authorities may have scuppered one UK supermarket deal, but deal fever will resurface in time.

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CONTEXT NEWS

- Britain’s competition regulator on April 25 blocked J Sainsbury’s proposed 7.3 billion pound takeover of Walmart-owned Asda.

- The Competition and Markets Authority (CMA) said that the deal would lead to increased prices in stores, online and at many petrol stations across the UK.

- Sainsbury’s, Walmart and Asda said they had mutually agreed to terminate the transaction, opting not to challenge the CMA’s ruling through the Competition Appeal Tribunal, a specialist judicial body, which could have thrown it back to the CMA.

- The regulator concluded that the deal would result in a substantial lessening of competition at both a national and local level. It said this would mean shoppers across the UK would be affected, not just in the areas where Sainsbury’s and Asda stores overlapped.

- Sainsbury’s shares were down 5.5 percent at 214.2 pence by 0745 GMT on April 25.

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

(Editing by Swaha Pattanaik, Bob Cervi and Karen Kwok) ((Aimee.Donnellan@thomsonreuters.com; Reuters Messaging: Aimee.Donnellan.thomsonreuters.com@reuters.net))