Booker Blues

Tesco Needs to Get a Grip

Tesco needs to get a grip on its big Booker purchase.
Chris Ratcliffe/Bloomberg
At Closing, May 22nd
247.50 GBp

Tesco Plc's attempted takeover of Booker Group Plc is a bit like the faulty shopping cart that wants to steer you into a pyramid of canned goods. It's a shaky-looking deal. So credit to Britain's biggest supermarket for trying to gain a modicum of control over the process. 

Tesco has asked the U.K. Competition and Markets Authority to hurry up its probe into the merger, by cutting short the first phase of the investigation and moving straight into a more detailed round. Given Tesco's scale, it was always likely that the deal would need a long so-called "phase two" probe. Tesco was clearly expecting this. But at least with an earlier start, the probe should be wrapped up in time to hit completion by early next year.

Under Scrutiny

Tesco remains Britain's biggest supermarket so a lengthy competition probe into the Booker deal is likely

Source: Kantar Worldpanel

Tesco shouldn't stop here, though. Some things are out of its hands as it tries to push the deal through against the open opposition of two of its biggest shareholders, Schroders and Artisan Partners. But there are other areas where it can exert control, not least in getting out there and selling the deal harder to doubtful investors and doing whatever it can to raise the transaction's cost-saving targets.

If Tesco CEO Dave Lewis needs any motivation, he could just look at the 17 percent drop in his company's share price since the takeover was announced in January. They're close to where they were when he took the job in September 2014, as the company reeled from an accounting scandal.

Booker Bounce Shortlived

Tesco shares have fallen 17 percent since the takeover was announced

Source: Bloomberg

The stock decline reflects concerns about buying Booker, plus worries that Tesco's own recovery is running out of steam. Another fear is Inc.'s designs on the global bricks and mortar grocery business after its $13.7 billion pound acquisition of Whole Foods Market Inc.

Cold Comfort

Underlying sales growth has failed to convince Tesco shareholders that its recovery is on track

Source: Company reports. Bloomberg Intelligence

With the decline in Tesco's share price, the value of its Booker offer is 3.4 billion pounds ($4.4 billion), compared with about 3.7 billion pounds when the deal was announced. That leaves the field open to a rival bidder.

Adjusting the terms of the deal is hard to imagine without a competing offer, given that some Tesco shareholders have already accused it of overpaying. But Tesco should spell out more fully the benefits of the merger before investors vote on it. It has pointed to synergies of about 200 million pounds, with 175 million pounds of cost cuts, and just 25 million pounds of extra sales. Yet veteran retail analyst Dave McCarthy of HSBC estimates the real figure could reach 500 million pounds.

Proving there's more value in this transaction might make it more palatable to those unhappy shareholders, and lift the shares. That in turn would bolster the price for Booker investors, who've seen an already meager deal premium dwindle because of Tesco's declining stock.

Without taking a firmer grip, the Booker deal will just keep on heading in an unwanted direction.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andrea Felsted in London at

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    James Boxell at

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