Tesco’s merger with Booker is an intelligent combination of unique, large-scale, highly capable businesses, say Ray Gaul, vice president of research and analytics and Simon Johnstone, senior analyst, Kantar Retail
The boards of Tesco PLC and Booker Group PLC announced an agreement to merge their respective companies.
High level financial details of the merger include:
- Combined revenues: Tesco PLC revenue of GBP48.4 and Booker Group PLC revenue of GBP5.0
- Operating and symbol group formats: Hypermarkets, Supermarkets, Convenience, Online Retail, Cash & Carry both delivered and pickup, and foodservice
- Business Trading names/Fascia: Tesco Extra, Tesco, Tesco Metro, Tesco Express, Tesco Bank, Tesco Direct, Tesco.com, Tesco Mobile, PayQwik, One Stop, Booker Wholesale, Makro, Booker Direct, Classic Drinks, Ritter Courivaud, Chef Direct, Premier, Family Shopper, Budgens, Londis and Booker India.
- Exchange of shares and management: if the merger is approved by the CMA, the new company will provide Booker shareholders with 16% of the new company shares and two positions on the combined board.
- Transaction value (estimate): Tesco will provide GBP3.7 billion to buyout Booker shares at a price of 205.3 pence per Booker share.
Headline rationale for the merger was provided by the combined boards as providing:
- An updated approach to the rapidly changing food consumption habits of modern Britain: the combined company believes that it can be the best at supplying British consumers, independent retailers, caterers, and small businesses with more flexible and speedier approaches to in-home and out-of-home forms of food consumption – the main focus of the company’s energy will be on modernising out-of-home consumption solutions
- Opportunities to reduce costs and decrease food wastage: British businesses are facing a wide range of increased costs from property, wages, business rates, and digital investments; the new company will have greater control over more of the supply chain and therefore will unlock opportunities to reduce costs and keep price rises limited for the benefit of consumers and businesses over the next three years
- The creation of a more agile supply chain: both companies have embarked on a supply chain modernisation program. The combined company will accelerate the implementation of these changes, enabling the company to better source own label, fresh/ultrafresh, imported and specialty foods, and react to changes in demand in shorter bursts of time
- Further investment in digital forms of shopping including order and collect: the most surprising element of the merger proposal is the formation of a combined collection point service, which will enable multiple parties to gain direct access to the food supply chain, across 8,000 UK collection points for consumers and even more options for businesses
The boards have stated that they hope to achieve the following timeline:
- 26 January 2017: Share purchase transaction
- 24 March 2017: Booker financial year-end, special dividend date to Booker shareholders
- June/July 2017: Tesco and Booker Annual General Shareholder Meetings to take place with approvals required
- End of 2017/Early 2018: Scheme to become effective
Kantar Retail’s viewpoint:
The age of shopper first – in which consumers can choose what, where, and when to eat, using multiple sources of information connected to multiple devices, with real-time social sharing and advice – has stimulated a new era for the British food supply chain. Just Eat and hungryhouse started the revolution of how at home food consumption choices are made. The speed of change should not be underestimated. For example, Amazon Prime’s recently launched free restaurant delivery service has already attracted more than 180 restaurant chains to the list of available partners. UberEATS and other services can boast equally or even more impressive figures.
Tesco and Booker remain highly exposed to these new forms of consumption should they not take bold and impressive steps to evolve. These changes in food consumption habits, combined with the expected rise in costs related to Brexit, the new National Living Wage, and new business rates, make this merger an intelligent combination of unique, large-scale, and highly capable businesses.
However, the merger will face a number of very challenging obstacles that may be too large to conquer in a timely and cost-effective manner. Kantar Retail believes that the largest challenge will come from the government: The office of the Competition and Markets Authority, Groceries Code Adjudicator and the Financial Conduct Authority will all have reasons for concern. We believe that the newly combined company will have to make several concessions prior to getting a green light to proceed. However, the ultimate obstacle will be the British consumer, and effectively understanding what they want from Tesco/Booker in their new repertoire of food consumption habits.
We highlight several conflicts of interest that may arise in the course of the merger undertaking.
- Symbol Groups: between the two companies they control several large and significant convenience symbol groups which provide employment and predictable wages to many independent store owners and retail workers. The competition authorities may require the new company to guarantee the independence of these companies in a more transparent manner than is currently the case.
- Suppliers: the combined company may have high levels of market share in some categories of foods, and therefore pose a potential threat to fair trading practices between suppliers and the company. Government authorities have made previous rulings on retailer purchasing power and the government will want to establish transparency to make sure that suppliers are treated fairly in the future.
- Previous or precedent rulings: in 2000-2001, The Big Food Group (now Iceland Supermarkets) acquired Booker in a similar merger. t the time, the Financial Services Authority approved the merger but Iceland’s failure on two occasions to keep the market accurately informed of price sensitive information constituted breaches of the listing rules. Kantar Retail has contacted the CMA and reviewed their prior decisions. At this moment in time, we believe that this will be the first chance for the body to make a ruling which will set a precedent for future mergers of a similar nature.
Overall assessment: The merger is likely to go forward but will take time and the group will need to make some concessions along the way.
Call to action: Supplier companies will need to make many adjustments to their 2017 and 2018 plans in order for their products to be best represented at retail, wholesale, and other business locations. Kantar Retail has formed a task-team of experts in retail, FMCG strategy, and category support who are ready to help suppliers prepare for the new opportunities that this merger unlocks.