Trouble in store for Tesco?

Tesco is getting a good deal with its bid for wholesaler Booker. But regulators could yet block the merger, says Ben Judge.

Last week, Tesco surprised investors with a £3.7bn bid for Booker, which is Britain’s biggest wholesale food distributor and also owns the Makro cash-and-carry and the Budgens and Londis chains of shops. The deal represents “a massive bet on post-Brexit Britain and the UK consumer” by Tesco, says Allister Heath in the Daily Telegraph.

Tesco has retrenched from unprofitable overseas ventures and is reshoring “vast amounts of cash” in a bid to become the “undisputed king” of the UK consumer market. By buying Booker, it could rationalise its operations, “freeing up unwanted property that could be turned into housing”, while transforming Booker’s systems, and increasing productivity.

Buying Booker is a “defensive but logical move” for Tesco, says the Financial Times’ Lex column. Booker is a better business than Tesco. Its operating margins are almost twice as big and it “converts a greater proportion of that profit into cash”. So the price that Tesco is paying looks reasonable – the £175m of annual savings will “easily cover the premium being paid”.

Quite, says Stephen Wilmot in The Wall Street Journal. That’s why the deal is much sweeter for Tesco than for Booker’s shareholders. In the past ten years, Booker turned £100 of investor cash into over £2,300. Tesco turned £100 into £67. “When you own a great company you deserve a great takeover premium.” The mere 12% premium that Tesco is paying for Booker “looks too slim”.

Nor is it obvious what Tesco adds to Booker’s business, says Wilmot. Booker had organic growth of 5.1% excluding cigarette sales last quarter. Tesco had a meagre 1.5%. And as a supplier to caterers and restaurants, Booker benefits from the rising trend for eating out; supermarkets don’t. You can argue Booker gets access to Tesco’s purchasing power, but this is “where the risks lie”, as competition authorities circle.

The Competition and Markets Authority (CMA), which regulates mergers in the UK, will almost certainly take an interest given Tesco’s “already substantial negotiating power with its suppliers” and the fact that it “owns a range of convenience stores that compete with Booker’s customers”.

The CMA should wave the deal through, says Heath. Tesco will be able to harness its buying power to supply wholesale products to small retailers at lower prices, supply Booker’s franchises with the tools to make them more efficient and offer better prices to customers. The outcome will be to “enhance competition and efficiency”.

Not likely, says Matthew Vincent in the Financial Times. Yes, supply chains and logistics will be merged, but overall “the value of the strategy is questionable”. All Tesco is getting from this deal is “the ability to squeeze suppliers a little bit harder”.