The Competition and Markets Authority (CMA) says it has concerns the merger between the two supermarket giants could cause higher prices and worse customer experiences.
The regulator says it has found “extensive competition concerns” in its investigation of the merger.
The deal was first referred to the watchdog in September 2018 after it said the merger presented sufficient initial concerns.
The CMA says it believes the deal would lead to a worse in-store and online experience and reductions in the range and quality of products on offer.
It says it also has concerns that prices would rise at a “large number” of Sainsbury’s and Asda petrol stations which could lead to higher fuel costs in areas where both supermarkets' stations operate.
The deal could lead to shoppers across the UK being negatively affected, and reduced competition where Asda and Sainsbury’s shop catchment areas overlap.
Stuart McIntosh, chair of the independent inquiry group carrying out the investigation, says: “These are two of the biggest supermarkets in the UK, with millions of people purchasing their products and services every day.
“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.”
The watchdog does however insist that these findings are provisional, and the two companies will both now have the opportunity to respond to them.
Mr McIntosh adds: “These are our provisional findings, however, and the companies and others now have the opportunity to respond to the analysis we’ve set out today. It’s our responsibility to carry out a thorough assessment of the deal to make sure that the sector remains competitive and shoppers don’t lose out.”
The watchdog has set out options for the supermarkets to address the concerns. It says it could fully block the deal from taking place, or order the firms to sell a “significant number” of its stores and other assets to recreate the competitive market lost by the merger.
The CMA is pessimistic however that the companies will be able to address the concerns raised sufficiently.
The supermarkets have responded jointly to the CMA’s findings, strongly refuting the watchdog’s report.
Their spokesperson says: “These findings fundamentally misunderstand how people shop in the UK today and the intensity of competition in the grocery market. The CMA has moved the goalposts and its analysis is inconsistent with comparable cases.
“Combining Sainsbury’s and Asda 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.
“We are surprised that the CMA would choose to reject the opportunity to put money directly into customers’ pockets, particularly at this time of economic uncertainty.
“We will be working to understand the rationale behind these findings and will continue to press our case in the coming weeks.”