Ahead of Sainsbury's takeover, Asda's recovery gains momentum

* Asda has agreed to be taken over by Sainsbury (Amsterdam: SJ6.AS - news) 's

* Q1 underlying sales up 1 pct, adjusted for Easter

* Pleased with workforce response to Sainsbury's deal (Adds detail, Asda CEO, Walmart CEO quotes)

By James Davey

LONDON, May 17 (Reuters) - Asda, the British supermarket arm of Walmart that is set to be acquired by Sainsbury's , reported a fourth straight quarter of sales growth, saying its recovery under new management was gaining momentum.

The firm also said on Thursday it was pleased with the response of its 146,000 workforce to last month's 7.3 billion pounds ($9.9 billion) cash and shares deal that will see Sainsbury's combine with Asda to overtake Tesco (Frankfurt: 852647 - news) as Britain's biggest supermarket group.

Asda, the UK's third largest grocer after Sainsbury's and market leader Tesco, said like-for-like sales, excluding fuel, rose 3.4 percent in the three months to March 31, its fiscal first quarter.

Adjusting for Easter, which fell within the quarter this year, like-for-like sales grew 1.0 percent - an acceleration from growth of 0.5 percent in the previous quarter.

"Our Q1 performance – even when adjusted for increased sales from an early Easter – represents genuine momentum," said Chief (Taiwan OTC: 3345.TWO - news) Executive Roger Burnley.

He said Asda attracted 246,000 new customers in the quarter with lower prices, 216 new own-brand products and better store standards.

Though Asda's gross profit rate fell compared with last year, partly reflecting the price cuts, operating income increased.

Burnley succeeded Walmart veteran Sean Clarke as CEO in January with full knowledge the deal with Sainsbury's was on the cards. He had re-joined Asda in 2016 as chief operations officer after a decade at Sainsbury's.

Sainsbury's and Asda aim to generate buying power and savings to better compete with fast-growing discounters Aldi and Lidl, a bigger Tesco after its 4 billion pounds purchase of wholesaler Booker, and the rise of online shopping, particularly the march of Amazon.

If the deal goes through, both the Sainsbury's and Asda brands will be maintained, with Burnley continuing to lead Asda.

COLLEAGUE RESPONSE

"We were pleased with the response of our colleagues in the UK following our announcement of the proposed merger of Asda with Sainsbury," said Walmart President and CEO, Doug McMillon.

The deal does, however, face close regulatory scrutiny.

Competition lawyers say Sainsbury's and Asda face an uphill battle to get the bid passed by the Competition and Markets Authority (CMA) without having to sell off so many stores that it removes the rationale for the deal.

Sainsbury's and Asda have expressed confidence the CMA will not insist on mass store disposals but have declined to say how many would make the deal unattractive.

However, a source with knowledge of the situation told Reuters a figure "into the hundreds" would likely kill the deal.

The deal will see Walmart receive 3 billion pounds and take a 42 percent stake in the combined business. It has the option of selling down to 29.9 percent after two years and exiting completely after four.

Separately on Thursday Walmart beat first-quarter profit and revenue expectations.

Last month Sainsbury's reported a 0.9 percent rise in underlying sales in its latest quarter, while last week No. 4 Morrisons reported a 1.8 percent rise in underlying retail sales. ($1 = 0.7412 pounds) (Editing by Kate Holton and Adrian Croft)