Tesco was ‘smart’ in £3.7bn deal with Booker
The merger – confirmed today – will give suppliers a broader market opportunity and strong growth prospects, Tesco claimed.
Investment research firm Edison director of research Neil Shah said: “With Booker onside, Tesco will have smart first-mover advantage in tying up the food supply chain in the brave new world of online shopping, with Amazon the main disrupter and a pricing race to the bottom within the core grocery stores market catalysed by Lidl and Aldi, all of which makes shopper loyalty increasingly fickle.
‘Rivals concerned’
Tesco merger with Booker – at a glance
- £3.7bn deal
- Will create the UK’s “leading food business”
- Suppliers to gain broader market opportunity and growth prospects
“Tesco ceo Dave Lewis is consciously talking about how the deal would not change its retail store footprint ahead of competition regulatory scrutiny. But, that is almost a double bluff as he will be careful to avoid talking food supply chain where control of the market – including competitor retailers – is what will make rivals concerned.”
Tesco was prioritising the convenience market in the UK; backed by its merger with Booker, owner of convenience stores Budgens and Premier, analyst Euromonitor said. In Euromonitor’s latest Tesco report, it said the supermarket might have peaked its network size.
Euromonitor said: “Convenience stores – where Tesco held a category leading share of 17% in the UK in 2015, via its Tesco Metro/Express format – is clearly a strategic priority, and the company added 1,105 net new outlets in the format between 2010 and 2015.
“However, it may be at the peak of network size. In early 2015, Tesco announced plans to close 18 Express and 12 Metro sites, as part of its strategic overhaul.”
‘Subsumed’
Meanwhile, Shore Capital analyst Clive Black claimed the deal was good for Tesco, but bad for Booker’s shareholders. Booker’s stock might be “subsumed” into a lower Tesco, he warned.
“The strategic rational of this combination is neither wholly straightforward nor compelling to our minds,” Black said. “In particular we see a real danger that focused, cash positive and high cash converting Booker, with a very well-funded dividend and special distribution on an ongoing basis, may be de-rated; that is Tesco stock is not de-rated to Booker's multiple but Booker's stock is subsumed into a lower Tesco.
“A question that came into our mind post the Musgrave acquisition in relation to Booker was, is the business running out of deals; this merger perhaps suggests that this is indeed the case.”
Shore Capital maintained its ‘hold’ stance on Tesco shares, but downgraded Booker shares to ‘sell’.
What other analysts say about Tesco’s merger with Booker:
- Economist Intelligence Unit retail analyst Jon Copestake: “As takeover deals go, this is a significant one for Tesco and it has a little bit of everything to it. Not only will the deal deliver synergies to Tesco, but the wholesale acquisition will help Tesco to move further up the supply chain, increasing the retailer’s buying power with producers and enabling it to deliver more competitive prices to consumers.”
- Verdict Retail content director Patrick O’Brien: “Investor reaction has been hugely positive, with Tesco shares soaring 9% in early trading. The deal also gives Tesco the opportunity to sell its own-brand ranges into the convenience stores Booker supplies, enabling it to weaken the power of the big brand suppliers such as Unilever which it had a public spat with over price rises last year.”
- LCP Consulting chairman Alan Braithwaite: “The big win is that it takes Tesco into the foodservice arena which is the food growth market – people are eating out and institutional catering is still growing. It will give the business the platform to further challenge in that market.”
- Cavendish Corporate Finance partner Jonathan Buxton: “This is a deal which departs from Tesco’s traditional consumer-facing business and we question the impact this acquisition will have on foodservice operators and independent retailers (which are themselves competitors to Tesco), if, for example, prices go up under Tesco’s ownership. By combining with Britain’s biggest food wholesaler, Tesco can expand the reach of its products via different distribution channels but in doing so could increase pressure on both its suppliers and the independent retail sector.”
