Asda and Sainsbury's deal is an 'Amazon protection program,' investment manager says

  • The firms said that the combined business will generate at least £500 million in cost savings and lead to a reduction in prices of about 10 percent.
  • Peter Toogood, chief investment officer of Embark Group, told CNBC that the deal wasn't "the most sophisticated."

The merger deal between J Sainsbury and Walmart's Asda is an attempt to protect against the rise of e-commerce giant Amazon, an investment manager told CNBC on Monday.

The two companies announced early Monday that they willjoin forces to become the U.K.'s largest grocer, surpassing Tesco. The deal, worth about £7.3 billion ($10 billion), will keep both the Sainsbury's and Asda brands.

The combined business will generate at least £500 million ($688.62 million) in cost savings and lead to a reduction in prices of about 10 percent, the supermarkets said.

Peter Toogood, chief investment officer at Embark Group, told CNBC's "Squawk Box Europe" that the deal wasn't "the most sophisticated."

He described the merger news as "the Amazon protection program continues."

Sainsbury's and Asda have struggled with their sales growths, which have weighed on their ability to obtain cheaper deals with suppliers. Both competition from online and from discounters has put pressure on the grocery market.

"It's just putting two companies together that aren't growing. So, again, it will help the margin story, but they have also just told you they are going to whack prices down by 10 percent… Tesco…, if anything, is holding their price," Toogood added.

Kevin O'Byrne, chief financial officer at Sainsbury's, told CNBC's "Squawk Box Europe" that the merger "allows us, particularly in a very competitive market online and with discounters, to give much greater value to our customers and that's very important."

The firms said in a statement that Walmart, which owns Asda, will have 42 percent of the issued share capital of the combined business and will not hold more than 29.9 percent of the total voting rights.

Of the impact of Amazon on investment decisions, Toogood said: "Just for laughs, every meeting we go to is what area can Amazon go into, including things like car paint. Those are actually conversations we have with fund managers."

Walmart is also looking to give up control of its Brazilian presence, but to invest in India, according to The Wall Street Journal. The company is reportedly looking to buy a majority stake in India's largest e-commerce company Flipkart Group.