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

With $4.6 Billion Booker Buy, Tesco’s Lewis Charts New Course
Gaining access to the fast-growing market to supply restaurants and hotels and pooling the U.K.’s biggest supermarket chain with the No. 1 food wholesaler, Tesco Plc agreed to buy Booker Group Plc for about 3.7 billion pounds ($4.6 billion).
Though the value of the offer quickly rose as Tesco shares surged as much as 11 percent, the grocer said it will pay a mixture of cash and shares worth 12 percent more than at Thursday’s close.
“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.”
With the rise of online shopping having wreaked havoc among Britain’s grocers and as Chief Executive Officer Dave Lewis seeks to regain the upper hand in a rapidly-changing U.K. retail market where the incursion of budget chains Aldi and Lidl, the takeover marks the biggest step yet in his revival. Tesco had suspended dividends after a multi-million pound accounting scandal and the company said that it would also reinstate it.
A shift in consumer spending toward experiences like travel and dining out is a trend that Lewis hopes to capitalize on along with the deal. Giving it access to an 85 billion-pound market that’s growing faster than its main supermarket business, Tesco gains 200 food wholesale depots. Supplying about 5,500 independent convenience stores and a unit serving restaurants and pubs would also be able to be done by the deal.
Combining its One Stop chain with Budgens, Londis and Premier, which are supplied by Booker, Tesco would capture about 30 percent of the U.K. convenience-food market. And hence there is a possibility that the U.K.’s Competition and Markets Authority wil hold a long review of the deal.
 “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.”
Saying the takeover won’t give Tesco ownership of any more stores, Lewis downplayed the regulatory concerns on a call with reporters. In its network with food, tobacco and alcohol, Booker has contracts to supply the independently-owned outlets.
“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.”
Within three years of the transaction there is expectation within Tesco that the annual pretax synergies of at least 200 million pounds, the company said. As Tesco would be absorbing the British wholesaler, and its CEO, Charles Wilson, will join Tesco’s board., shareholders of Booker will own about 16 percent of the combined company.
JPMorgan Cazenove advised Booker, while Greenhill, Barclays and Citigroup advised Tesco.

Christopher J. Mitchell

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