Booker's stunning swoop on Nurdin & Peacock last September was as logical as it was audacious. After all, the attractions of cutting one's throat in ferocious price wars hold little long-term appeal for any major company. And faced with over-capacity in a declining market, the opportunity to remove a rival made sound commercial sense. Booker is convinced the £264 million acquisition of N&P, completed in November, will deliver major strategic advantages. Combining N&P's £1.6 billion of sales with its own £2.96 billion turnover has given the enlarged wholesaling giant control of 37% of the cash and carry and delivered wholesaling market. It can now secure better deals for customers engaged in their own equally fierce wars with the major supermarket chains. Buying efficiencies, rationalisation and cost-saving opportunities, plus a stronger position in own-brand products, should all add millions to Booker's bottom line ­ up to £10m a year, it believes. That's the theory. But, as ever, implementation is quite another matter. Seven months on, and the integration is causing more headaches than Booker's chiefs would like to admit. Delays to the rationalisation process are creeping in, which will inevitably postpone the cost-cutting benefits of the deal. This could be dangerous. The acquisition has put a severe strain on Booker's balance sheet and the group is heavily overgeared. In acknowledgement, its share price now stands at 290p against last year's 490p high. Booker has promised it can slash £100m of debt by 1998 through cost savings and stock management efficiencies. But retail observers are starting to ask some tough questions. Booker has talked a good story over the N&P purchase, they say. But can it deliver on the promises made? Much of the current problem stems from the fact that Booker was already deep in the throes of a major internal reorganisation when it was offered N&P. Project Heartland, a challenging £95 million restructuring of Booker's distribution network, has been in train since 1995. Four massive regional distribution centres are under construction. They will improve deliveries to Booker's C&C depots, which should be able to cut their stockholding requirements considerably. To add to the challenge, Booker's foodservice distribution network is also being incorporated into the new infrastructure. But the acquisition of N&P's 55 depots has forced a total rethink for Project Heartland. Even the four new depots cannot cope with the 60% extra volume required for the enlarged network. An additional £20 million, 242,000 sq ft depot is now required, and will probably be built in Northampton. This rethink has delayed the completion of Project Heartland for at least another six months ­ pushing it into 1998. Additional time and expense is also being incurred by adding 50% more space than originally planned at the distribution centres in Haydock, Hatfield and Bristol. The logistical problems of integrating the new distribution systems are the major challenge posed by the acquisition. But there have been other unforeseen difficulties. There are rumours that the N&P business was in much worse shape than Booker thought: warehouses contained many unwanted lines; non food stocks were incompatible with its business; and N&P's computer systems were primitive ­ some were not even networked to head office. Booker was also embarrassed to discover N&P had been enjoying far superior terms with some suppliers than those obtained by its own buying team. This disparity was swiftly addressed by Booker Belmont Wholesale trading director Richard Maude-Roxby, who demanded an adjustment to trading terms. It could be argued that this was an immediate benefit from the takeover. But the City still has doubts over Booker's management abilities; doubts the group can ill afford, because it needs all the City support it can get. To acquire N&P, Booker saddled itself with nearly £400m of debt. Net borrowings increased from £129m to £381m ­ which took Booker's gearing to over 4,000%. That this is so high is down in part to British accounting practice: the £140m goodwill write-off, following on from the Fitch Lovell £215m write-off in 1990, took Booker's book value to just £10m. More reassuringly, Booker's market capitalisation stands at nearly £900m. Nevertheless, the steep gearing has led European credit rating agency IBCA to downgrade Booker's long-term rating from A minus to BBB+. IBCA's Tim Pitman says: "The rating downgrade is a result of the increased financial risk taken on by Booker. Although sound from a business perspective, net debt has increased and the company's equity base has been reduced by the goodwill write off." The agency has confidence in the underlying strategy. Debt is expected to fall, though it remains highly doubtful that Booker can realise its promised £100m without relying on disposals in the prepared foods division. Noting the company has taken steps to improve efficiency and cashflow, Pitman comments: "If successful, these measures will improve profitability and protect margins and coverage ratios. However, the increased pressure on the balance sheet outweighs the effect of the potential success of these measures." He adds: "They will have to work very hard to keep their interest bills under control. There will be real problems if there's slippage in the integration programme." IBCA is not alone in voicing concerns about Booker. Tim Potter, analyst at Merrill Lynch, is disappointed at the delays to the integration process. "The cost and the task of integration is clearly bigger than Booker anticipated. And with some other problems in the agribusiness, and the disappointing extra costs incurred by the Holroyd Meek acquisition, they've clearly got quite a lot on their plate at the moment." His view is that it will be 1999 before the full 12 months' benefit of the acquisition, and its integration, comes through. There should be some tangible benefits before 1999 ­ though analyst Michael Landymore of broker Henderson Crosthwaite is less bullish than Booker. "For next year, they're looking at just over £100m pre-exceptional profits ­ we'd put it slightly less. Beyond that, in 1998, they're saying mid-£120m; we say about £120m. And for 1999, they say low £140m. We reckon low £130m." Landymore's calculations are based on Booker achieving savings of up to £15m from the new distribution network; £20m from the N&P integration; and a further £10m from changes in its foodservice division. To set that in context, Booker's 1996 pre-tax profits were £101.9m ­ which were reduced to £13m by heavy exceptionals. In the previous year, Booker reported pre-tax profits of £82.8m. Clearly Booker's performance is now under intense City scrutiny. But its executives are presenting a relaxed public face. Adrian Busby, chief executive of Booker Belmont Wholesale, even goes as far as to claim "there have been no banana skins with the N&P purchase". He adds: "The problem of making an acquisition of this size has not happened. It all looks set fair for shareholders and customers." But Mike Camp, finance director at Booker Belmont Wholesale, confirms there were "plenty of surprises" when it took possession of N&P. "There were some unpleasant surprises, but then there were also some pleasant ones too, such as the customer loyalty we discovered. Overall, we're comfortable with what we found in the round." Camp also acknowledges the strains on its distribution network. "The process is certainly complicated. But it is going reasonably well. Thirteen of the branches are being reviewed this year, and some branch closures have already been announced. And two more of the new distribution centres will be open this year." The N&P acquisition has posed other problems, notably the decision over which stores to retain and which own label brands to promote. Get either wrong and the battle to secure the loyalty of N&P's customer base will be lost ­ with considerable damage to Booker's existing customers too. With the independent sector now accounting for just 9% of the UK grocery trade, these decisions are crucial. Busby may point to the doughty stayers who have withstood the power of the multiples, yet even he has to admit that the number of C&C customers continues to fall. But if, as the analysts say, the underlying fundamentals are not compelling, Busby still sees significant upside in his business. "Independent retailers will survive as long as their prices and products are acceptable to the local community. When we bought N&P we could see the benefits of saving them and getting them to concentrate on fighting off the threat of the multiples rather than fighting each other. We are now doing our bit by offering own label lines with a minimum 27% profit on return. Many have a profit of more than 40%. This is what I call a tangible share of the benefits of our N&P merger. "We are also helping to create new identities with a range of four fascias suiting different specialist shopkeepers." That programme is still in its infancy. And although there is confidence that 200 traders will be operating under the Premier title within a year, many independent retailers who have carried either Booker's Family Choice logo or N&P's Happy Shopper styling may feel reluctant to change. A further concern for Busby is not knowing quite how former customers will behave. He is optimistic that, in his words, "instead of our C&C customers spending half their money with us and half with N&P, all or most of it will come to us". This, of course, presupposes that all ex-N&P customers make the switch. But it could be that they were also buying at a Bestway or Blakemore depot, for instance. They may now choose to take most of their business to one of these operators rather than put all their groceries in the Booker basket. Busby and his team will be doing all in their power to avoid that happening. But some bolshy retailers and caterers will need more persuading, with extra carrots' maybe, and that could have a bearing on the already pressured bottom line. Despite the many difficulties surrounding the acquisition, progress is being made. The incorporation of Midas computer systems into N&P branches is going according to plan. And the first conversions of N&P depots to the Booker format have taken place at Peterborough and Brighton. The Tradewatch scheme, based on stricter interpretation of trade-only', is also being applied. That means weeding out many of those who were allowed in when N&P introduced its Trade & Business Warehouse concept. "Virtually anybody appearing in Yellow Pages used to be able to obtain a card," says Busby. He adds: "We have cut out expensive items like computers and photocopiers, but retained more everyday items like stationery and paper clips. The non food range in N&P branches is being reduced from 9,500 lines to 5,500, and we have pulled out of clothing, like sweaters and jeans. "What we've done is meet the N&P non food selection half way. What we won't be selling are the ceramic elephants and bankers' green lamps. Things like that were really bought for N&P's ill-fated Cargo Club, and then sold through T&BWs." The food offering is also being reviewed, with the aim of achieving the right balance between N&P's 20,000 lines and Booker's 18,500. For Busby and his management team, it was an easy choice to retain N&P's Happy Shopper range, given that the £100m-plus turnover was double that of its own Family Choice brand. Happy Shopper is spearheading the main own brand grocery thrust, with Booker's Family Choice label being used for a second tier value' selection. "There will be about 600 own label launches from now until the end of the year," says Busby. "That's an enormous logistical challenge." The value of Booker's total own label range, including its retail, catering, tobacco and drinks brands, is £819m. And Busby is proud of the fact that the newly-enlarged Booker has become the third leading UK grocery concern in terms of volume shifted. The IGD puts it on 375 million cases annually (including foodservice), against Tesco with 750 million and Sainsbury with 660 million. But while the multiples, by and large, have their distribution systems working like clockwork, Booker still has some way to go. Nor can it afford further slippages if it is to realise the full potential of the merged operation. Everybody agrees the end prize is well worth the risks the cash and carry king is taking. As to whether it can pull it off, the jury is still out. {{COVER FEATURE}}

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