Tesco’s Booker takeover: the big questions answered

As the food and drink industry digests the news of the proposed mega-merger between Booker and Tesco, The Grocer looks at the key questions posed by the deal.

How long has the deal been in the works?

Much of the amazement this morning was how the two titans had managed to keep the merger plans a secret until 7am this morning. According to Tesco CEO Dave Lewis, the two have been in talks for nearly a year and his friendship with Booker chief executive Charles Wilson was a key driver.

“Charles and I have known each other a long time,” said Lewis. “The decision came from a conversation we were having on how the market was evolving.

“We got ourselves to a place where the big prize was in merging the two businesses.”

According to Wilson: “We talked about a few tactical opportunities at the start but we ended up saying hey, this could be bigger than that.”

What benefits will the deal create for Booker and Tesco?

Tesco shareholders last received a payout in December 2014, and no doubt they are a key factor in the deal despite Lewis’ assurance it is all about improving service for customers and suppliers.

Tesco has identified synergies of £200m a year, mostly to come from suppliers, with at least £25m per annum from revenues and the remaining £175m from procurement and distribution savings.

Tesco shareholders are being urged to vote in favour of the deal at the forthcoming Tesco General Meeting, and the retailer predicted customers would be “delighted” by the prospect of better quality and cheaper priced food across retail and eating out locations.

Meanwhile, the Booker directors, who have been advised by JP Morgan Cazenove as to the financial terms of the merger, said they considered the terms to be “fair and reasonable” and intended unanimously to recommend Booker shareholders vote in favour.

Wilson said: “If you look around the world, the food industry is changing. It’s different from five years ago. This deal creates a very powerful combination. What you’ll see on procurement and supply chain is we’ll take carbon out of the equation. We can buy all of the broccoli out of a field, and put it into stores, into catering, into pubs. That’s why wholesale/retail puts us into the same platform.“

Will the deal make it past the competition authorities?

That was perhaps the biggest question on everyone’s lips once the initial surprise had worn off this morning.

Lewis was bullish about the chances of the deal gaining a seal of approval from the all-important Competition & Markets Authority (CMA), stressing the independent ownership of the stores linked to the Booker empire.

“In this merger, Booker doesn’t bring any store ownership,” he said. “We’re not acquiring more stores. We’re very confident that when the competition authorities have considered the deal they will come to the same conclusion as we did in our due diligence – that there isn’t an issue. Charles doesn’t have an influence over the offering. We service an enhanced convenience outlet but don’t have ownership. There isn’t an influence on pricing or ranging.”

However, not all analysts are convinced.

“Our instant reaction is that the CMA will have a field day with this,” warned analyst Nick Bubb. “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.”

Mark Brumby at Langton Capital also suggested the CMA would be on high alert. Bruno Monteyne, senior analyst at Bernstein, said the companies could be forced to relinquish some stores as part of the deal.

Will the deal lead to major job cuts?

With Tesco staff having already been through huge job cuts since he took over, Lewis was adamant that the merger would not mean another round of the axe, despite speculation already in the City that one of the appeals to Tesco would be the opportunity for huge cost savings. “I can’t emphasise enough that the idea is to bring expertise to the business,” said Lewis. However, analysts predict a huge period of rationalisation if the merger does goes ahead. “There are very material cost savings,” said Monteyne. “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.”

What opportunities are there for Booker and Tesco to grow the out of home sector?

The two merger partners say the combined group will lead the market in both the ‘in home’ food market and the ‘out of home’ food market but stressed the faster-growing latter as the key opportunity.

“Booker supplies 450,000 catering businesses – Wagamama, Prezzo, Carluccio’s,” said Wilson. “This is a real opportunity to continue to improve the offer. It gives them opportunity for scale, to power up the out of home market.”

“OOH is very significant,” he added. “When you’re talking to pubs, for example, with a better supply chain that will grow our sales. We serve 11,000 schools. Many of these customers are looking for better choice, prices, service and quality. We serve Aramark, which serves caterers. We serve Byron. There is lots of headroom.”

Speaking exclusively to The Grocer, Tesco’s chief product officer Jason Tarry agreed. “Customers are changing their buying habits,” he said. “Eating on the go, eating out and ordering in the home. In our space it’s difficult to do that. The lunchtime meal deal we do well. Breakfast and take-home tea we don’t do so well. What this does is take us much further forward in getting closer to the growth part of the market. Accessing more growth.

“Out of home is the growing part of the market. What we’re doing with food to go is the opportunity everybody is investing in. Meal kits and meal solutions. Bridging the gap. That’s where customers are going.”

What will Charles Wilson’s role be?

Wilson’s future in the group is also a key talking point. It was announced that on completion of the merger, both he and Booker chairman Stewart Gilliland will join a combined group’s board and Wilson will also sit on a combined group executive.

Wilson, it has emerged, has also entered into a ‘lock-up agreement’. This means he has agreed, subject to “certain customary carve-outs”, not to dispose of his current holding of 24,533 Tesco shares and the new Tesco shares he will receive pursuant to the merger during a five-year period from the effective date of the merger.

His 6.1% stake in Booker (108 million shares) are worth more than £220m at the offer price.

“Charles is going to join the board and the executive,” said Tarry. “He is transferring his share ownership into the merged group and pledging to hold his shares for five years. That’s a very significant amount of money to merge into the business.”

Does today’s bombshell news explain the mystery of why Compass boss Richard Cousins quit the board at the start of January?

For all those trying to work out why Cousins quit, suddenly it makes a lot of sense.

While not openly admitting it was the Booker deal, Lewis said the pair had clashed over the plans for Tesco to join forces with a huge rival to Compass.

“I have a huge amount of respect and appreciation for Richard and his contribution,” said Lewis. “It’s fair to say there were differences of opinion. The overwhelming majority of the board believed this was the right way forward but Richard was of a different opinion. The quality of debate is a demonstration of really good governance. I have the utmost respect for Richard and am grateful for his contribution over the past two years but we are clear about the business and the direction we want to go in.”

Will independent stores be living in terror?

“I think they’ll be excited,” claims Wilson. “It may take a little persuading at first, but when they understand they will be excited. Independents are facing a lot of pressure right now on rates and the national living wage. What they are looking for is better choice, price, service. We think we’ve made good progress. Sales to retailers are growing strongly. With the combined capabilities of Tesco, we’ll do a better job for them. In five years they’ll say we’ve been able to do a better job for them.”

What will the impact be on suppliers?

Despite the huge power a merged group would have in the market, Lewis claimed the deal was a massive opportunity for suppliers, who he promises will be “right at the heart of what we’re doing”. Tesco said the deal would broaden the market opportunity for its suppliers, with “strong growth prospects and a clear opportunity to develop better own brand and fresh ranges”, especially in the relatively untapped out of home sector.

Will brands like Budgens and Happy Shopper be scrapped? Could we see Tesco brands in local independents?

Wilson said the arrival of Tesco would not mean the kiss of death for the Booker brands.

“I would be really surprised,” he said. “Independents are very passionate about their branding.”

But he does claim there are opportunities.

“Some people who don’t have access to the One Stop brand might be really excited about it but we serve the retailers. We don’t own their businesses.”

Lewis added: “When we explore, we do think there are services that could be provided that aren’t there at the present. We will ignite your imagination. Delivery capability in terms of Tesco. Reach and frequency that when our vans are lying idle is when they are most needed by Charles’s customers. We expect to launch innovative new services. There will be innovation at every level.”

What will it mean for Tesco stores?

It’s not just Tesco’s arrival in Booker’s turf, but the potential for the retailer to use some of its partner’s key assets that makes the deal so mouthwatering.

Lewis said that on top of the £25m in growth synergies there was a huge opportunity for Tesco to capitalise on Booker’s food offer. “Part of this is how we can increase the quality of our offer in both of the businesses. The opportunity is clearly there to provide more range and to offer more value.

“Part of that is improving the offers. There’s an opportunity for some of that professional range that Charles does so well. This is detail we’ll have to work through. The opportunity is more choice, more range, more value, enhancements in service.”

Wilson also stressed the key role of digital in the merger.

What are the implications for Tesco and Booker’s delivery fleet?

One of the key areas of rationalisation spoken about by Lewis and Wilson today concerned the huge combined delivery fleet of the two operators. With Tesco boasting 5,200 vans and Booker a fleet of 1,200, they said it made economic and environmental senses to combine deliveries.

Putting an environmentally friendly spin on the deal will do its cause no harm and alongside the deliveries, Lewis also spoke of the benefits of the deal for whole crop utilisation and the prevention of food waste.

“Nobody likes waste and if you’ve got an opportunity to combine deliveries in one journey it makes sense, “ said Lewis.

Whether it is seen as such good news by Tesco’s and Booker’s delivery drivers remains to be seen.

What does it mean for Tesco’s online offer?

As it seeks to compete with the growing threat of Amazon, Tesco has seen a huge opportunity to add to its online offering with the addition of an extra 8,000 click and collect points set to become available at a stroke under the merger.

Having scaled back on its online ambitions in 2016 and faced competition from others such as Sainsbury’s Argos takeover, the Booker merger suddenly gives Tesco a powerful extra advantage over its supermarket rivals in terms of delivery capacity, without extra costs

What will give when a Tesco Express stores is next to a Budgens, Premier or Londis?

Lewis claimed today that Tesco would continue to develop its Express and One Stop portfolio but the takeover poses major questions about what will happen to stores linked with Booker when located nearby Tesco c-stores. Wilson admitted there was “some overlap”, including the small portfolio of Budgens stores still owned by Booker.

But Lewis said: “In the case of the independent shopkeepers running the Booker stores we are talking about very savvy entrepreneurs. They will realise that this deal gives them great new opportunities. What we want to do together to give them more opportunity from a product and price perspective. It’s an own brand and fresh food opportunity.”

How did the City react this morning?

Tesco shares jumped nearly 10% in early trading back to 206.7p as the deal was enthusiastically welcomed by the markets. The shares had previously slipped 8.6% backwards since the start of the year as investor enthusiasm over Tesco’s solid Christmas began to dissipate.

Booker shares jumped 16.2% to 212.8p, thanks in part to the premium Tesco is offering for Booker’s stock.

When will the merger go ahead if it is approved?

With the huge uncertainty over exactly what concerns the deal will give the CMA, it’s hard to tell exactly when the deal will go through. Lewis said his “best estimate” was the end of 2017/early 2018, but that “is just a guess”. Some experts believe it may take far longer.