Tesco to take on Booker Group in £3.7bn merger

The boards of food retailer Tesco and wholesaler Booker Group announced on Friday that they have reached an agreement on the terms of a recommended share and cash merger to create the UK's leading food business.

In a joint statement, the boards said the combined group would bring benefits for consumers, independent retailers, caterers, small businesses, suppliers, and colleagues, as well as delivering “significant value” to shareholders.

“The combined group will be well placed to serve the large, established 'in home' food market as well as the faster growing 'out of home' food market,” the statement read.

“By bringing together Tesco and Booker's retail and wholesale expertise, supply chain and digital capabilities, the combined group will be able to provide greater choice, quality, price and service in the food market, whilst improving efficiency and reducing food waste.

“The combined group will bring together the capacity and capability to generate new growth and deliver significant revenue and cost synergies.”

Under the terms of the merger, each Booker scheme shareholder will receive 0.861 new Tesco shares and 42.6p in cash for each Booker share held.

Based on the Closing Price of 189p per Tesco share on 26 January, the terms of the merger represent a value of approximately 205.3p per Booker Share, a value of approximately £3.7bn for Booker's ordinary share capital;, and a premium of approximately 12% to the closing price of 183.1p per Booker Share on 26 January.

The merger represents a premium of approximately 15%, based on the volume-weighted average share prices of Booker and Tesco since 12 January, and a premium of approximately 24% based on the three-month volume weighted average share prices of Booker and Tesco.

Booker Shareholders will own approximately 16% of the combined group based on the existing issued ordinary share capital of Tesco and Booker.

The boards said opportunities for revenue and cost synergies had been identified, supporting the significant shareholder value creation opportunity of the merger.

Tesco’s board said it expects pre-tax synergies for the combined group to reach a run-rate of at least £200m per annum by the end of the third year following completion of the merger.

Quantified revenue synergies of at least £25m per annum were anticipated to come by the end of the third year following completion of the merger, primarily from an enhanced offering and customer proposition.

The Tesco board said it also believes there is significant opportunity for further revenue synergies which have not yet been fully quantified.

Cost synergies of at least £175m were also expected, mainly in areas such as procurement and distribution.

Booker's CEO will join the combined group's board and executive committee, the announcement confirmed, and Booker's chairman will also join the combined group's board.

“Tesco has made significant progress in turning around our UK retail business,” said Tesco CEO Dave Lewis.

“This merger with Booker will further enhance Tesco's growth prospects by creating the UK's leading food business with combined expertise in retail, wholesale, supply chain and digital.

“Wherever food is prepared and eaten - 'in home' or 'out of home' - we will meet this opportunity with the widest choice and best service available.”

Charles Wilson, chief executive officer of Booker, said his company remained committed to improving choice, prices and service for the independent retailers, caterers and small businesses that it serves.

“We believe that joining forces with Tesco offers the potential to bring major benefits to end consumers, our customers, suppliers, colleagues and shareholders.”

Analysts were quick to point out that it wouldn’t be an easy ride for Tesco and Booker, however, with retailing analyst Nick Bubb saying the Competition and Markets Authority would be warming up for an extensive investigation.

“Our instant reaction is that the CMA will have a field day with this, as although Tesco is mainly a retailer in the UK and Booker a wholesaler, Tesco does own the One Stop convenience store chain that competes with Booker’s interest in symbol groups and convenience store retailing, so it is by no means clear that the CMA will allow things to proceed very far without having a good look at the overlap,” Bubb commented.

“There is an analysts meeting at 8.30am and ahead of that all eyes will be on the Tesco share price reaction, which has been quite weak recently.

“The forecast of a return to dividends and a confident profit outlook statement from Tesco should help it rally from 189p first thing today.”