Some local branches could be sold off to rivals, and perhaps even the Sainsbury or Asda brands themselves could be disposed of before the physical assets are combined, opening up areas where there's now some overlap between the two retailers to their competitors. It would also give the world's biggest retailer Walmart a way to exit Britain, one of the weakest performers in its portfolio.
The CMA said options to address concerns could include blocking the deal altogether, or forcing the chains to sell off a "significant" number of stores and assets, potentially including either the Sainsbury's or Asda brand.
"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 United Kingdom". "We wouldn't see this as necessarily being as unprecedented as Mr Coupe does", he said.
Walmart's shares slipped more than three per cent, to US$99.04, in afternoon trading. The company's market capitalisation fell to £5.3bn from £6.3bn.
Tesco's shares were little changed.
Hargreaves Lansdown senior analyst Laith Khalaf said the CMA had "basically kicked the Sainsbury-Asda merger into touch".
The CMA said it would allow stakeholders to challenge its provisional findings and provide further evidence before it makes its final decision on whether to kill the takeover.
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Sainsbury's and Asda have already reacted angrily to the report in a statement this morning, hitting out at the CMA for its "misunderstanding".
The watchdog said selling one of the two brands could "recreate the competitive rivalry lost through the merger", though experts said the actions to address its concerns would leave the deal dead.
Bernstein's Monteyne said there were now enough worries at Sainsbury's "to make the shares almost uninvestable in the next few months".
The CMA's objections contrast with the relatively easy passage given to Tesco's takeover of Britain's biggest wholesaler Booker, which rivals and some analysts had argued would give Tesco an nearly unassailable position in United Kingdom retail.
"We will be working to understand the rationale behind these findings and will continue to press our case in the coming weeks".
Walmart's worldwide business, which accounts for about 24 per cent of its total revenue and rang up $120.8 billion in sales for its latest fiscal year ended January 31, has seen choppy growth.
Sainsbury's has repeatedly stated prices would drop by about 10 percent for products customers regularly buy following the deal.
UBS, Sainsbury's house broker, has said the deal's economics can absorb at least 132 store disposals and potentially dozens more.