City Snapshot: Tesco and Booker to merge in £3.7bn deal

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Tesco (TSCO) has swooped in a surprise deal to acquire listed wholesaler Booker (BOK) in a deal worth £3.7bn.

The share and cash merger, already agreed by both groups, will create the UK’s leading food business and “delight consumers with better availability of quality food at attractive prices across retail and eating out locations”.

Tesco said in a statement to the London Stock Exchange that the deal would bring benefits for consumers, independent retailers, caterers, small businesses, suppliers, and colleagues, as well as delivering significant value to shareholders.

Booker shareholders will receive 0.861 new Tesco shares and 42.6p in cash per share. Based on the closing price of 189p per Tesco share on 26 January 2017 (the last business day before the date of this announcement), the deal is worth 205.3p per Booker share and values the wholesaler at £3.7bn.

It represents a premium of 12% to the Booker closing price of 183.1p a share. Booker shareholders will own 16% of the combined business after completion.

Booker CEO Charles Wilson will join the combined group’s board and executive committee.

Tesco CEO Dave Lewis said: “Tesco has made significant progress in turning around our UK retail business. 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 added: “Booker is committed to improving choice, prices and service for the independent retailers, caterers and small businesses that we are proud to serve. We believe that joining forces with Tesco offers the potential to bring major benefits to end consumers, our customers, suppliers, colleagues and shareholders.”

Tesco added that following its improved performance and the board’s confidence in its future prospects, dividend payments will recommence in the 2017/18 financial year. Shareholders last received a pay out more than two years ago in December 2014.

The deal with Booker is also expected to bring significant synergies. Tesco said it expected the combined group to reach a run-rate of at least £200m a year by the end of the third year following completion of the merger. It will be made up of quantified revenue synergies of at least £25m per annum, along with at least £175m from procurement and distribution synergies.

Tesco shares have rocketed 8.5% to 206p on markets opening this morning and Booker’s stock has soared 14.2% to 209.7p.

The deal has been unanimously recommended by both boards, but will still needs a green light from Tesco and Booker shareholders, as well as approval from the CMA.

Morning update

Outside of the excitement of a merger between Tesco and Booker, there is little else to report from the stock market. The FTSE 100 has opened up, just, at 7,163.71 points (0.04% rise on yesterday’s closing price). Morrisons (MRW) is up 0.2% to 236.8p and Sainsbury’s (SBRY) nudged 0.4% higher at 259.2p.

On The Grocer this morning, there is a story on the levels of food and drink M&A activity for 2016.

The proposed exit from the single market as the UK negotiates its exit from the EU could help M&A activity in the food and drink sector as potential overseas buyers look to secure access to British customers, a senior dealmaker has suggested.

It comes as the latest Bite Size M&A report by Grant Thornton revealed that foreign appetite for UK food and drink continued to grow in 2016.

Overseas buyers for UK and Irish targets accounted for 32% of the 198 deals in the sector last year, an increase from 28% in 2015 and 20% in 2014, the report showed.

There were 48 deals in the fourth quarter of 2016, bringing the year’s total to 198 compared with 215 in 2015. However, 2016 was still the second busiest year for sector M&A activity since 2007.

Brexit prompted a short-term slowdown from April to June ahead of the EU referendum, with the second quarter the softest of the year, but there was no sustained reduction appetite.

Trefor Griffith, head of food and beverage UK at Grant Thornton, said that the exit from the common market could hamper deal flow if buyers who wanted to use the UK as a gateway to Europe were put off by the risk of more restricted access to EU markets.

However, he added that buyers might also need to secure a base in the country.

“Potential buyers assessing how to access UK customers in the post-Brexit world may now consider a direct investment in the UK, given a base in Europe may no longer guarantee free access,” he said. “But the net impact on deal activity is hard to determine at this early stage of the exit process.”

The full story is available at thegrocer.co.uk/finance. Click here to read.

Yesterday in the City

Unilever (ULVR) suffered an investor sell off yesterday after CEO Paul Polman warned that growth has slowed in the fourth quarter and would not recover until the second half of 2017. Shares fell 5% to 3,184p despite underlying sales in 2016 rising 3.7% and net profits increasing 5.5% to €5.5bn.

The consumer goods giant dragged the FTSE 100 into the red, falling 0.04% to 7,161.49 points. Diageo (DGE) saved the blue-chip index from worse losses as its buoyant first-half results helped the stock climb 3.6% to 2,217p (and share were up more than 5% in early trading). The Johnnie Walker maker reported a 14.5% jump in sales to £6.4bn in the six month to 31 December. Operating profits were also up 28% to £2bn, driven by favourable exchange rates and organic growth.

WH Smith (SMWH) continued to make gains, up another 2% to 1,616p, on the back of upgrades on Wednesday. The stock is up more than 9% in the past two days.

Fallers yesterday included Associated British Foods (ABF), down more than 3% to 2,389p, Greggs (GRG), down 2.3% to 965.5p, and Ocado (OCDO), down 2.2% to 244.9p.