Tesco and Booker’s £3.7bn merger: what the analysts say

Richard Lim, chief executive, Retail Economics said: “Tesco’s announcement to merge with Booker Group will be a game changer in the food industry. Its laser-like focus on the core UK food business is cutting deeper down the supply chain. The acquisition will strengthen Tesco’s wholesale and supply chain expertise while its digital capabilities will improve efficiency and provide significant cost saving synergies.

As shopper behaviour continues to evolve rapidly, the new group will be well placed to capitalise on home shopping and the increasingly important area of eating out which has been the growth driver of the experience economy.”

Analyst Nick Bubb said: “We were expecting a quiet morning. Dave Lewis and the estimable Charles Wilson (and a host of City advisers) had other ideas, because they have announced a “merger”. In fact, of course, Tesco is taking over Booker, but the deal values Booker on paper at £3.7bn (205p), so it is not exactly a small potato. It will be interesting to hear the potential £200m of cost and revenue synergies quantified. Our instant reaction is that the Competition and Markets Authority 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 (via Premier and Londis etc), 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.”

Bruno Monteyne, senior analyst, Bernstein said: This is UK consolidation - biggest retailer merges with biggest wholesaler. This gives the combined group access to a much larger market opportunity: £110b for ‘in home’ (Tesco estimate sector growth at +2.4% 2015-2018) and £85m for ‘out of home’ food (Tesco estimate sector growth at +3.8% 2015-2018). There are very material cost savings: both have a big UK food supply chain network which means big rationalisation. This is additional to Tesco’s plan for 3.5% to 4% margin.Booker has an opportunity to leverage Tesco’s superior product range (e.g., in fresh) to drive faster growth. For Tesco there’s the additional benefit of adding 8,000 new click and collect points. CMA approval is required which may mean some store closures in convenience network. People often nervous about food retail mergers due to execution risk around consolidating banners. In this case, like Ahold Delhaize, this risk won’t be present.”

Clive Black, Shore Capital, said: “The strategic rational of this combination is neither wholly straightforward nor compelling to our minds. 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.”

Neil Shah, director of research at Edison Group 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.Tesco CEO Dave Lewis is consciously talking how the deal would not change its retail store footprint ahead of competition regulator 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.”

John Ibbotson, consultant, Retail Vision: “The Tesco of old is back. This is an extremely bold move and demonstrates an intent and sense of purpose that have been missing for the best part of a decade. It also represents the official end of the global dream. For Tesco, the jewel in the crown is once again the UK. With the acquisition of Booker, which owns Budgens and Londis, Tesco has shown its hand. Its competitors, in particular the discounters, now know they’re in a fight. The message is unequivocal: the UK grocery sector, both retail and wholesale, is ours and we are taking it back.Dave Lewis is very clearly setting out to create Britain’s biggest food business and reinforce Tesco’s leading position not only as a grocer but as a wholesaler multichannel retailer with an unassailable position in the UK food business. Its competitors will be deeply concerned by Tesco’s increased buying power, with its dominance stretching further throughout the British food industry. This news will give suppliers and manufacturers real cause for concern.”

Alastair Lockhart, insight director at shopper and retail marketing agency Savvy, said:: “Tesco’s takeover of Booker makes good sense. Even though Tesco is getting back in its feet, growth in the core UK grocery market is set to be limited over the next few years. Growth in convenience, on-the-go and food services meanwhile remains buoyant and we see a lot of opportunity for innovation. There are many synergies between these complementary businesses and the economies of scale from the deal will help the merged group remain competitive as we enter a period of higher price inflation.”

Iona Carter, Director, Shoppercentric, said: “In the face of growing costs of food production, it makes sense for Tesco to increase their buying power yet further by acquiring a business like Booker - even if this was not a deciding factor in the acquisition process, as Mr. Lewis claimed. But, what this certainly reflects is Tesco’s recognition that grocery shopping habits are changing: big shopping trips are in decline, as shoppers increasingly either drop them completely or move them on-line; conversely, smaller basket shopping trips are on the increase - which is where the convenience sector can cash in. Extending its reach into this channel by supplying the independent sector can only be a good thing - they will cease to become competitors in the traditional sense. It is also a lower risk foray into the out of home channel - but it will be interesting to see how the fortunes of this channel will play out in the Brexit climate as consumers and shoppers start to tighten their belts once more.”

Societe Generale’s analyst said:  ”We read this as a clearly a defensive move in an increasingly tough UK trading environment. Generally speaking, in a context of stiff price competition and sluggish top line growth, one way to protect a business is to tap cost synergies via M&A (hence Tesco/Booker) or purchasing agreements (as seen in France in 2014 with three partnerships, i.e. Auchan/Systeme U, Casino/Intermarche and Carrefour/Cora). Tesco is flagging at least £200m of synergies in year 3, o/w £175m cost synergies (55% procurement, 35% distribution & fulfilment and 10% central costs). We see relatively limited execution risks, presumably no change of banners but optimization of logistics and IT systems. Tesco expects earnings accretion as of year 2 - our initial view is that a 5-10% boost to earnings is a reasonable target. We note that Tesco also indicates that it intends to recommence dividend payments in the 2017-18 financial year, which should reassure Booker shareholders. Booker CEO Charles Wilson will join the combined group’s board, which should strengthen Tesco’s already well-recognized UK management team.”

And, Jefferies analysts reserved judgment on the deal, until becoming better acquainted with the Booker business. “However, our instinct is that financial considerations may have been more central to this takeover than industrial logic. Beyond today’s reflection of synergy accretion, we struggle to see why investors may want to pay an expanding multiple for Tesco/Booker.

“Past experience suggests limited synergistic attractions for a platform spanning the food wholesale and retail markets. There are certainly opportunities at buying level, and some logistics overlaps. But ultimately, the customer dynamics are very different, especially as far as the foodservice channel side of things is concerned (presumably the more exciting part of Booker). And, indeed, it was Mr Wilson’s mantra in recent years that UK grocers were structurally impacted by a world of changing consumer habits. Today’s deal certainly challenges that investment thesis. By the same token, we are surprised as to why the combination was deemed a priority for a business like Tesco, a retailer focused on a very ambitious journey of margin rebuild, facilitated by confidence in consistent industry LFL outperformance,” they said.