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Tesco still favorite stock despite Walmart’s Asda deal with Sainsbury’s, asset manager says

  • The $10 billion deal between the two grocers, announced last week, was welcomed by the investment community, but according to one asset manager, Tesco is still the best stock pick.
  • On the Asda-Sainsbury's merger, Dixon said: "This is an amazing opportunity for the other players in the space to actually really assert their authorities."

The U.K. supermarket space has drawn renewed attention from investors following the tie-up between Walmart's Asda and J Sainsbury.

The $10 billion deal between the two grocers, announced last week, was welcomed by the investment community, but according to one asset manager, Tesco is still the best stock pick.

"Perhaps with most other people, we've been focused on Tesco," Henry Dixon, asset manager at Man GLG, told CNBC's "Squawk Box Europe" on Thursday.

"I think the Sainsbury's-Asda news is pretty interesting," he said, adding that it may not mean a higher market share for the companies involved, however.

Sainsbury's and Asda are, respectively, the second and the third largest supermarkets in the U.K. If approved by regulators, their tie-up could mean that they would surpass Tesco as the largest food retailer in the U.K. But, Dixon said: "If you go back and look at the Morrisons deal for Safeway, what was clear when companies merge, they lose quite a bit of market share."

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In 2004, Morrison, the fourth-largest supermarket chain in the U.K., bought the Safeway brand in a £3 billion ($4.06 billion) deal. In 2017, Morrisons struck a deal with grocery chain McColl's to supply Safeway products to 1,300 convenience stores and 350 newsagents.

Still, on the Asda-Sainsbury's merger, Dixon said: "This is an amazing opportunity for the other players in the space to actually really assert their authorities."

According to a Reuters poll, two analysts ranked Tesco as a strong buy; 10 analysts ranked it as a buy; four considered it a hold; and only three gave it a sell grade. The majority of the analysts said Sainsbury's is a stock to hold.

Tesco reported last month preliminary results for the fiscal year of 2017/18, showing like-for-like sales up by 2.2 percent and a reduction in net debt by £1.1 billion.

Further mergers?

Morrisons, which reported Thursday a 3.6 percent increase in like-for-like sales during the first quarter of the year, has left the door open to a potential bid for Sainsbury's.

David Potts, CEO of Morrisons, declined to comment when asked if he would rule out bidding for Sainsbury's, Reuters reported. He added that he is waiting to hear the verdict from U.K. regulators on its tie-up with Asda.

Potts also declined to comment if he was considering a closer relationship with Amazon.