Crunch time as Tesco’s acquisition of Booker goes to shareholder vote

Approval would create the UK's largest foods business
Thursday 22 Feb 2018 Author: James Crux

Shareholders in Tesco (TSCO) will next week (28 Feb) vote on whether Britain’s biggest retailer should buy food wholesaler Booker (BOK). Approval would create the UK’s largest
foods business.

The deal was unconditionally cleared by the Competition and Markets Authority (CMA) on 20 December 2017. It is now up to shareholders in both Tesco and Booker to approve the acquisition.

Under the terms of the takeover, Booker shareholders would receive 0.861 new Tesco shares and 42.6p in cash for each share they hold. Based on Tesco’s 206.3p closing price on 1 February, the deal values Booker at £3.9bn or 220.2p per share.

WHY IS IT SO SIGNIFICANT TO TESCO?

Dave Lewis-led Tesco, the UK’s biggest grocer by market share, is a mature business. It claims the acquisition would provide shareholders with access to a larger and faster growing market opportunity for the enlarged business.

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While the consumption-at-home market is significant and stable, the eating-out market continues to grow and evolve. Delivery and convenience are becoming increasingly important to business customers and consumers.

Bringing together the pair’s retail and wholesale expertise would arguably mean Tesco is well positioned to offer a more innovative proposition to customers and consumers in a larger and faster growing market.

Taking Tesco into wholesaling and bringing the Londis, Budgens and Premier brands into the fold, the merger would position Tesco as a major supplier to the eating-out and convenience store markets.

These markets both offer superior growth prospects compared to the food-at-home market Tesco stores currently serve. As the largest UK food retailer, Tesco could also leverage its scale to cut costs, reinvest in pricing and become even more competitive.

Tesco also claims the merger would improve the enlarged group’s efficiency and yield at least £200m of annual synergies three years after completion.

Booker’s strong cash flow is seen to be another key attraction, as it would boost the dividend-paying capacity of Tesco.

As for Booker, it tells shareholders that by being subsumed into the enlarged Tesco, it would be able to further improve choice, prices and service to its retail, catering and small business customers.

WHY ARE SOME SHAREHOLDERS OPPOSED?

Two major Tesco shareholders (Schroders and Artisan) last year questioned the merits of the tie-up and may not vote in favour of the deal.

There are concerns such a large transaction could derail Tesco’s recovery under Lewis at a time of changing shopping habits, fierce levels of industry competition from rivals including Aldi and Lidl and Amazon, and with consumer budgets also stretched.

Other commentators argue the price being paid for Booker looks full and the deal would add unwanted levels of complexity to what is proving to be a successful Tesco turnaround.

As for Booker shareholders, US hedge fund Sandell Asset Management recently said it would oppose the takeover bid unless Tesco made a  better offer. (JC)

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