The UK’s competition watchdog has said the proposed tie-up between Sainsbury’s and Asda could push up prices and cut choice for customers.
The Competition and Markets Authority (CMA) said it was “likely to be difficult” for the chains to “address the concerns”.
The CMA also said the merger could lead to a “poorer shopping experience”.
Sainsbury’s boss told the BBC the findings were “outrageous” and he would continue to challenge them.
Chief executive Mike Coupe described the CMA’s analysis as “fundamentally flawed” and said the firm would be making “very strong representations” to it about its “inaccuracy and lack of objectivity”.
“They have fundamentally moved the goalposts, changed the shape of the ball and chosen a different playing field,” he told the BBC.
“This is totally outrageous.”
Sainsbury’s shares were down more than 12% in early Wednesday trading.
These are the CMA’s provisional findings and the firms will have a chance to respond, before it publishes its final decision on 30 April.
The watchdog said it had identified two potential remedies to the loss of competition: either blocking the merger entirely or forcing the sale of “assets and operations”, including stores or even the Sainsbury’s or Asda brands.
However, it added that it “currently considers that there is a significant risk that a divestiture will not be effective in this particular case”.
The two chains would need to sell “sufficient assets and operations to enable any purchaser to compete effectively as a national in-store grocery retailer”.
It added that it may not be possible to achieve an effective solution to the loss of competition “without also divesting one or other of the Asda or Sainsbury’s brands, in addition to physical assets and operations”.
The deal would create a business accounting for £1 in every £3 spent on groceries with a 31.4% market share and with 2,800 stores.
Stuart McIntosh, chair of the CMA’s independent inquiry group, said: “We have provisionally found that, should the two merge, shoppers could face higher prices, reduced quality and choice, and a poorer overall shopping experience across the UK.
“We also have concerns that prices could rise at a large number of their petrol stations.”
However, in a joint statement, Sainsbury’s and Asda said combining the two chains would create “significant cost savings, which would allow us to lower prices”.
“Despite the savings being independently reviewed by two separate industry specialists, the CMA has chosen to discount them as benefits.”
Dominic O’Connell, Today business presenter
Supermarket bosses know that British competition regulators have always had a strong interest in the grocery market. There has been a string of inquiries over the last two decades, both into individual deals and the bigger question of how well the market serves consumer interests.
So Sainsbury’s board members would have been nervous when they proposed a takeover of Asda last year – but they did at least have the encouragement that the Competition and Markets Authority (CMA) had approved a tie-up between Tesco and Booker just a few months earlier.
Unfortunately for them, the light at the end of the tunnel turned out to be an oncoming train.
The regulator has crushed Sainsbury’s plans. There is no veto, but the strong language used, and the breadth of the problems found, suggest there is no way back.