How analysts reacted to CMA provisional clearance of Tesco-Booker

Bruno Monteyne, senior analyst, Bernstein:

“The argument that Tesco and Booker don’t compete directly in the convenience market won. The stores that are part of Booker’s symbols (Budgens, Londis, Premier, etc) are (almost all) independent stores that can buy part of their supply outside Booker and swap to a different symbol or wholesaler.

“This puts the focus on deal closure in early 2018.

“This is a positive catalyst for the Tesco share price as it reduces the uncertainty over this deal. However we expect some uncertainty to remain as the focus will now shift to: will investors approve the deal? Our investor survey indicates that Tesco shareholders will approve with sufficient margin (threshold is 50%), so the focus will be on Booker shareholders where the threshold is 75%. With a higher shareholder hurdle and the Tesco share price below the level of when the bid was made (around £2.00), Booker shareholders may argue for a higher share price.

“While Tesco’s current equity story is one of profitability (margin recovery in the UK), the Booker deal allows Tesco to bring growth back into the equity story. The food out of home market (ie restaurants, hotel, catering) is of similar size to the food retail market and growing faster. The combined operational capabilities of Tesco and Booker will allow for a whole new service level in the wholesale supply of businesses, allowing for a rapid market share grab by Tesco/Booker. This should be sufficient to make Tesco not only the biggest grocer in the UK but also one of the fastest growing food retailers in the UK for many years to come.”

David McCarthy, head of consumer retail, HSBC

“The Tesco Booker merger is good for shareholders, customers and staff. Management has suggested cGBP200m synergies, but our analysis suggests gross synergies of GBP500m will result. We would then expect half of these to be invested back into the offer to drive sales growth. So the benefit will be felt through incremental cash profit We estimate GBP350m of buying synergies, with cGBP150m split between revenue synergies and cost cutting.

CMA says the merger will not lessen competition as Booker has less than 20% of the total wholesale market, therefore there is sufficient competition to prevent market abuse. At store level, there is no incentive for Booker to raise prices as non-Booker supplied stores might capture sales and Booker supplied stores would switch to other wholesales. Furthermore as Tesco retail margin is higher than Booker wholesale margin, there is no incentive to raise prices at Tesco to drive customers to Booker. On the few incidents where there are local overlaps, the cost of implementing a local pricing strategy is disproportionately high relative to the benefit.”

 

Molly Johnson-Jones, senior retail analyst, GlobalData

“Tesco-Booker now has the all clear - and the wholesale convenience market will never look the same again. Despite its ‘provisional unconditional clearance’ of the deal and findings, we think that the wholesale convenience market still has a lot to be concerned about from the scale of operation and buying power that the deal generates. Clearance was based on the lack of overlap in the supplied catering division, which accounts for 30% of Booker’s sales, and the fact that any price competition would be beneficial for consumers and wouldn’t push other players out of the market.

“Although there was very little doubt that the deal would go ahead, the market anticipated that there may be some conditions attached to the process, such as the divestment of some stores, or restrictions on operation in order to avoid monopoly of the UK food retail market.

“Despite the CMA saying that ‘existing competition is sufficiently strong in both the wholesale and retail grocery sectors to ensure that the merger between Tesco and Booker will not lead to higher prices or a reduced service for supermarket and convenience shoppers’, Tesco-Booker will fundamentally change the structure and competition in the convenience market.

“To fail in its new-found form, Tesco-Booker will have to do a lot wrong, given the operational scale and buying power that the merger generates, especially with provisional unconditional clearance and the subsequent assumed lack of restrictions on operation. Two excellent CEOs who have commanded a turnaround and successful growth, respectively, of Tesco and Booker are coming together to run a food retail behemoth.”

Richard Curry, partner, Rapleys:

“The food retail sector has experienced a significant shake-up over the last few years. The rise of the discounters along with the pervasiveness of eCommerce has seen most, if not all, of the traditional food retailers reassess their strategies and store portfolios.

“Food retailers are being far more selective in terms of their store requirements and this, coupled with a lack of property supply, is making mergers or partnerships increasingly attractive – particularly where these can be aligned with complementary offerings such as in-store dining concepts and e-commerce.

“The CMA’s provisional approval of the proposed Tesco / Booker merger may well cause something of a domino effect and will likely inform any judgement on the pending Co-Op / Nisa tie-up. Other mergers or alliances in this space may be on the horizon, providing increased competition for the traditional players in the local convenience market like Costcutter and Spar.

“Clearly, the Co-Op / Nisa deal reaffirms that what food retailers are looking for is the goldilocks portfolio of stores. These are networks that are not too big, and not too small, and which bring costs under control while simultaneously evolving the retail offering to more effectively service consumers, whose buying habits have changed considerably in recent years.

“A sceptic might query Co-Op’s strategy of buying small stores from Nisa just a year after selling small stores to McColls, particularly whether Co-Op’s new-found acquisitiveness has been stimulated by concerns that the small store sell-off risked throwing the baby out with the bathwater. Co-Op’s strategy is potentially a case of looking to have the convenience cake and eat it too, with the acquisition of an independent network giving Co-Op significant reach into the convenience market without centrally owning and managing the more than 3,000 Nisa stores it will have access to.

“What is clear, is that retailers are actively looking to right-size their portfolios, along with re-assessing supply chains, to manage costs and ensure they’re maintaining relevancy with consumers.”

Catherine Shuttleworth, CEO, shopper marketing agency Savvy

“As the green light is given this morning for the Tesco-Booker merger and Nisa members overwhelmingly vote through the Co-op deal, it looks like we are set for revolution in the convenience market - it will be an interesting few weeks as others in the market may now choose to show their hand.”

Graham Spooner, investment research analyst, The Share Centre:

“What’s interesting is that the announcement came on the same day as Kantar’s figures on market share. It appears competition is as rife as ever as a result of discounters Lidl and Aldi and as Tesco’s market share continues to fall, now at a level of 28%. This highlights one of the key reasons behind the merger.

“Tesco will be hoping that its sheer size and buying power will help it fend off others in the sector and restore it as the nation’s favourite supermarket. The jury is likely to still be out for some time on that. Indeed, we continue to recommend Tesco as a ‘hold’ as we believe fierce price competition and promotions are likely to remain a squeeze on margins for some time.”

 

Clive Black, director, Shore Capital

“Congratulations to Dave Lewis, Charles Wilson and their advisors on seeing off the UK Competition & Markets Authority (CMA) and so gaining tacit approval for their merger, which should complete in early 2018, as the management always guided.

Tesco shareholders will gain the brilliance of Mr Wilson whilst the whole business will have an additional free cash and earnings stream, which we will need to factor into our FY2019 forecasts and beyond. Synergies will no doubt be considerable and possibly materially above the prevailing guidance of £200m. Accordingly with this confirmation we upgrade Tesco from Hold to BUY and Booker from Sell to HOLD.

As for the rest of the UK food system, well colourful language and dismay nay apoplexy are probably understatements. The wholesale trade in particular will be wondering why on earth it ever bothered engaging at all with the CMA, an organisation that seemingly lives in a different universe to anything that may be considered a normal view of the world. If Tesco and Booker can merge with unconditional approval (with no proposed remedies), then the scope for further large-scale consolidation cannot be ruled out. Watch this space. We need to finesse our Tesco forecasts but unconditional clearance makes us warmer still on the Tesco investment thesis, hence our recommendation upgrades and we remain OVERWEIGHT on the sector.”