LONDON (Reuters) - Shortly after last year's announcement of a $9.4 billion deal to combine the Sainsbury's SBRY.L supermarket group that he runs with rival Asda, boss Mike Coupe was caught on camera singing "We're in the money".

Shopping bags from Asda and Sainsbury's are seen in Manchester, Britain April 30, 2018. REUTERS/Phil Noble/illustration

Not so fast, some competition lawyers, analysts and rivals warn, ahead of a provisional regulatory ruling due in the coming weeks on a deal that could create Britain’s largest retailer, with annual sales of about 51 billion pounds ($66 billion).

Recent decisions by the Competition and Markets Authority (CMA) suggest it won’t shy away from intervention, they say, and some conditions it could apply may prove too costly to make a deal worthwhile.

Coupe and Roger Burnley, chief executive of Walmart WMT.N owned Asda, have said they do not expect the CMA to make the deal unpalatable. The regulator is due to publish its final report in early March, although it could be delayed until the end of April.

Sainsbury’s and Asda say they will lower prices on “everyday items” by around 10 percent, financed by cost savings from big multi-national suppliers.

Others have doubts.

“Other than Sainsbury’s and Asda, it is hard to think of anyone involved in the industry that is publicly stating this takeover is not against the public interest,” said HSBC analyst David McCarthy.

He believes the CMA will not pass the deal without substantial conditions, and that it could even be blocked in its entirety.

Failure to secure the takeover would deal a major blow to Sainsbury’s efforts to prosper in the face of growing competition from discounters and online players, and would block one potential exit route from Britain for Walmart.

The key factor in the decision is whether the CMA, led by former lawmaker Andrew Tyrie since last June, rules the retailers must sell some of their combined 2,800 stores to protect competition in areas where they overlap.

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 told Reuters a figure “into the hundreds” could scupper it.

Even if a deal is cleared, finding buyers for large stores in an industry increasingly moving online and to smaller convenience shops will not be easy.

Rivals and suppliers have made a raft of submissions to the regulator opposing the deal.

Some analysts also drew negative inference from Sainsbury’s and Asda’s pre-Christmas clash with the CMA over its refusal to give them more time to respond to evidence, a row that went to court.

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And some of the CMA’s recent dealings have pointed to more intervention following a period where the perception was of a more hands-off approach.

That perception was underscored by its unconditional clearance of Tesco's TSCO.L takeover of wholesaler Booker in 2017, a decision that confounded most expectations.

But last year, the CMA indicated it may block credit data company Experian’s takeover of rival ClearScore, and took PayPal’s $2.2 billion takeover of Swedish financial tech firm iZettle to an extended probe.

“There’s a real sense with Tyrie’s arrival the CMA want to prove that they’ve got teeth,” said one competition lawyer, who declined to be named. “They can block it by asking for a disproportionately large number of stores being divested.”

The CMA declined to comment.

THE ALDI FACTOR

Since Coupe became CEO in 2014, Sainsbury’s has reported just one year of profit growth.

Subject to required store disposals, the combined group would become Britain’s biggest retailer, leapfrogging Tesco with a market share of more than 31 percent and a workforce of 330,000. Tesco has 27.8 percent, Sainsbury’s 16.2 percent, Asda 15.2 percent and Morrisons 10.6 percent, according to data from researcher Kantar Worldpanel.

German-owned discount groups Aldi and Lidl, with a total UK grocery market share of 12.8 percent, will be included in the CMA’s assessment.

If the regulator considers them powerful enough to prevent the merged group from hiking prices, that would work in favor of the acquisition.

But the CMA must decide whether Aldi or Lidl stores provide the same competition as Tesco or Morrisons stores do.

“If the discounters are excluded (not considered mainstream competitors) then Sainsbury’s and Asda have got a real difficulty,” said a senior UK grocery industry executive, who asked not to be named.

Sainsbury’s and Asda argue the discounters have an influence on how supermarkets of any size trade.

“For Aldi not to be a consideration in the market would be insane on the basis they’ve got a bigger own-brand business than we do,” said one Sainsbury’s insider.

While discounters have won market share from the big four grocers, they differ by operating smaller stores and selling a limited range of products versus the big four, for example.

METHODOLOGY IS KEY

The CMA’s initial investigation identified 463 local areas where Sainsbury’s and Asda stores overlap, which, it said, threatened higher prices or a worse quality of service.

Coupe and Burnley are banking on the regulator using a more sophisticated way of looking at the market in the latter part of the probe.

That methodology, used in the investigation into Tesco’s bid for Booker, would take into account the impact of a broader range of competitors, including discounters. The CMA also decides the inputs to the methodology.

“If you want to be interventionist there’s plenty of scope to do so in devising both your formula but also in some of the assumptions you feed into it,” said the competition lawyer.

The pledge to cut prices could also be problematic, if the regulator suspects they would come from smaller suppliers.

“There is no doubt whatsoever that 10 percent reduction won’t come from your Procter & Gamble, your Kellogg’s, your Coca-Cola; that will come from medium-sized to small-sized suppliers,” said the senior grocery industry executive.

Three years ago Coupe himself told Reuters that a major supermarket deal was a bad idea.

Since then he has become convinced an acquisition is the best way to survive the new climate, and has said he will go to court if any unfavorable ruling is not backed up by evidence.

Securing Asda would be the crowning moment of the 58-year old’s career, which has included stints at Asda itself, Unilever, Tesco and Iceland.

Failure would raise questions about Sainsbury’s strategy and Coupe’s job could be in peril, analysts said. With one exit route blocked, Walmart might consider a stock market listing of Asda.

GRAPHIC: UK supermarket market share - tmsnrt.rs/2RCNN7f