Photographer: Jasper Juinen/Bloomberg

Tesco’s Lewis Charts New Course With $4.6 Billion Booker Buy

  • CEO Lewis makes M&A debut, entering out-of-home food market
  • Offer price is 12% higher than Booker’s closing price Thursday

Tesco Plc agreed to buy Booker Group Plc for about 3.7 billion pounds ($4.6 billion), pooling the U.K.’s biggest supermarket chain with the No. 1 food wholesaler and gaining access to the fast-growing market to supply restaurants and hotels.

The grocer said it will pay a mixture of cash and shares worth 12 percent more than at Thursday’s close, though the value of the offer quickly rose as Tesco shares surged as much as 11 percent. Booker shares gained as much as 17 percent even as analysts expressed concern that the purchase will attract the scrutiny of regulators.

Charles Wilson and Dave Lewis on Jan. 27.

Photographer: Simon Dawson/Bloomberg

“It’s a game-changing deal that’s completely from left field,” Bryan Roberts, an analyst at TCC Global, said by phone. “It will give Tesco more bargaining power with suppliers and a huge slice of the retail convenience market.”

The takeover marks the biggest step yet in Chief Executive Officer Dave Lewis’s revival, as he seeks to regain the upper hand in a rapidly-changing U.K. retail market where the incursion of budget chains Aldi and Lidl, and the rise of online shopping, have wreaked havoc among Britain’s grocers. Tesco said it would also reinstate its dividend, which it had suspended after a multi-million pound accounting scandal.

With the deal, Lewis hopes to capitalize on a shift in consumer spending toward experiences like travel and dining out. Tesco gains 200 food wholesale depots, giving it access to an 85 billion-pound market that’s growing faster than its main supermarket business. The deal also brings rights to supply about 5,500 independent convenience stores and a unit serving restaurants and pubs.

Tesco would capture about 30 percent of the U.K. convenience-food market, combining its One Stop chain with Budgens, Londis and Premier, which are supplied by Booker. That raises the possibility of a long review by the U.K.’s Competition and Markets Authority.

For a Gadfly analysis of the deal, click here

“The CMA will have a field day with this,” said Nick Bubb, an independent retail analyst. “It is by no means clear that the CMA will allow things to proceed very far without having a good look at the overlap.”

Lewis downplayed the regulatory concerns on a call with reporters, saying the takeover won’t give Tesco ownership of any more stores. Booker has contracts to supply the independently-owned outlets in its network with food, tobacco and alcohol.

“The way competition authorities will look at this is the ability of the merged entity to have an influence over price,” Lewis said. “We don’t influence the retailer’s offering.”

The purchase is the first major one for Lewis, a longtime Unilever executive, who took over toward the end of 2014 to turn around a company in crisis. Under his watch, Tesco has repaired relationships with suppliers while winning back shoppers with lower prices, improved product availability and better service.

Booker investors will get 0.861 new Tesco share and 42.6 pence in cash for every share they own, the companies said. The offer was worth 205.3 pence at Thursday’s closing price. 

Booker shares rose as much as 17 percent to 214.6 pence in London, getting an added boost from a surge in Tesco stock, which advanced as much as 11 percent.

Tesco said it expects annual pretax synergies of at least 200 million pounds within three years of the transaction. Booker shareholders will own about 16 percent of the combined company as Tesco absorbs the British wholesaler, and its CEO, Charles Wilson, will join Tesco’s board.

JPMorgan Cazenove advised Booker, while Greenhill, Barclays and Citigroup advised Tesco.

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