Attitudes towards Tesco‘s (LSE: TSCO) proposed £3.7bn takeover of grocery wholesaler Booker Group (LSE: BOK) have been mixed, with the company’s share prices rising on the news, but major shareholders expressing opposition. Booker has published its fourth quarter results today, so what do they tell us about the likely fate of the merger?
No smoke without fire
The headlines have focused on how the new tobacco display ban and plain packaging restrictions have hit Booker, with tobacco sales down 7.5% on a like-for-like basis. This is to be expected, because everybody knows that government pressure on the nation’s dwindling band of smokers will only intensify. However, it won’t worry Tesco boss Dave Lewis, who is pursuing Booker for its food operations.
On this front the news is good, with group non-tobacco sales rising 4.7% like-for-like. Booker chief executive Charles Wilson said franchises Budgens and Londis are performing well, while internet sales increased a healthy 8% and Booker India continues to make progress.
Charles Wilson’s war
Total sales for the year to 24 March 2017 rose 6.7% to £5.3bn, and Booker ended up with approximately £160m in net cash. Wilson hailed the period as “a good year“, with good customer satisfaction scores and sales “the best we have ever achieved”.
There is nothing here to derail the Tesco bid. Lewis wants to create “the UK’s leading food business” (I thought he already ran it), by integrating Booker’s cash-and-carry wholesaler operations, which supply food to 120,000 independent retailers nationwide, while the group also owns the Londis, Budgens and Premier franchises. Its food service arm supplies high-street chains such as Wagamama as well as pubs, caterers and Rick Stein’s restaurants, and its direct arm generates £1bn of online sales to M&S and others.
The merger should also speed up Tesco’s push into the fast-growing convenience market, adding 5,400 stores to its 2,900-strong network of Tesco Express, Metro and One Stop brands. It reckons this will save it £200m a year and boost annual profits by £25m.
Ground for concern
The Competition and Markets Authority (CMA) may yet block the deal, which is also running into resistance from major Tesco shareholders, who think Dave Lewis is paying too high a price. Schroders and Artisan Partners, who collectively own 9% of Tesco, have asked it to pull out. Schroders fund manager Jessica Ground reckons that most acquisitions destroy value for acquiring shareholders. This is particularly true if you overpay in the first place, as many think Tesco is doing.
Today’s results from Bookers won’t affect the bid but it could backfire for other reasons, such as potential CMA intervention and the distraction of integrating Booker’s sprawling operations – Tesco already has quite enough on its plate. For me, the killer is that I did not rate Tesco even before the added uncertainty this deal will bring. I cashed out of the supermarket sector several years ago, and the Booker deal will not tempt me to carry myself back in.