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Tesco to buy Budgens and Londis owner Booker in £3.7bn deal Tesco to buy Budgens and Londis owner Booker in £3.7bn deal
(about 7 hours later)
Tesco, Britain’s biggest supermarket group, is to buy Booker, the UK’s largest food wholesaler and the company behind Londis and Budgens, in a £3.7bn deal. Tesco has agreed a £3.7bn deal to buy Booker, the cash and carry giant behind the Londis and Budgens convenience chains, in a move that will tighten its grip on the UK’s £195bn food market.
The two companies said they wanted to create the UK’s leading food business in a £195bn market, claiming it would “bring benefits for consumers, independent retailers, caterers, small businesses, suppliers, and colleagues, as well as delivering significant value to shareholders”. The deal is expected to be scrutinised by the competition authorities as Tesco is already the country’s biggest retailer, with more than 3,500 stores and control of close to 30% of the grocery market.
But the deal will raise questions over its impact on the UK’s grocery sector and is likely to be scrutinised closely by competition authorities. Tesco owns the 850-strong One Stop convenience store chain while in 2015 Booker acquired the Londis and Budgens chains, which are operated by franchisees but are supplied by Booker. The proposed acquisition would turn Tesco into a major supplier to small retailers, serving 125,000 independent convenience stores as well as 468,000 restaurants and pubs.
Nor was the tie-up completely unanimous among members of the Tesco board. The supermarket group’s chief executive, Dave Lewis, admitted that Richard Cousins, boss of catering group Compass who abruptly quit his position as senior independent director of Tesco earlier this month, was not supportive of the Booker deal, which took a year to negotiate. Analysts estimate the deal – if cleared by regulators – will hand Tesco another 2% of UK grocery sales courtesy of the Premier, Londis and Budgens chains that Booker supplies.
Lewis said he respected Cousins’ decision and described their discussions as “good governance” but stressed that the rest of the Tesco board backed the deal. The deal is the first major corporate move by Tesco since it was run by Sir Terry Leahy, who quit in 2011. In the years since, the grocer has been battered by the discounters and by the move to online and convenience shopping.
Tesco shares jumped 10% to 208p on the news, while Booker shares leapt 15% to 211p. Leahy’s successor, Philip Clarke, was forced to step down after a series of profit warnings and the grocer was then engulfed in an accounting scandal that is still the subject of a Serious Fraud Office investigation.
Lewis told BBC Radio 4 that the deal was a “low-risk merger”, adding: “Tesco and Booker are quite different businesses we but we have a lot in common – a focus on food.” Tesco’s current boss, Dave Lewis, who was parachuted in from Unilever to replace Clarke, said the Booker deal was good news for shoppers and the grocery industry. “The feedback we have had from our suppliers has been very positive, as they see a bigger, broader market opportunity,” he said.
He insisted it was the right time for the deal: “We do think that the recovery in Tesco is well under way ... It’s completely on strategy, it’s the next evolution of our strategy.” Booker chief executive Charles Wilson added that the independent shopkeeepers he worked with were also enthusiastic: “They think this will help them provide a better offer to their customers.”
Since taking the reins in 2014, Lewis has been reshaping Tesco following a damaging accounting scandal and a slump in sales. A strong Christmas performance has raised hopes of better-than-expected annual profits. Lewis and Wilson batted away suggestions the Competition and Markets Authority would be wary of a deal that reinforces Tesco’s dominant position in UK retail. “We are a wholesaler rather than a retailer,” said Wilson, while Lewis highlighted that it was not acquiring convenience stores as the outlets served by Booker are owned by independent retailers. Booker’s 200-strong cash and carry chain generates £3.2bn of its £5bn turnover.
Booker’s chief executive, Charles Wilson, will join the combined group’s board and act as a number two to Lewis, similar to his role as righthand man to Stuart Rose at Marks & Spencer more than a decade ago. Booker’s chairman, Stewart Gilliland, will also join the new board. Wilson owns nearly 6.3% of Booker and is swapping his holding for Tesco stock with a five-year lock-in. Retail experts nevertheless said Tesco’s biggest challenge would be convincing regulators that competition in the convenience store market was not being lessened by the combination, as in some neighbourhoods it is possible that Tesco will either run or supply every grocery outlet.
Lewis said the deal was about improving price, choice and service for customers and would cut food waste. James Lowman, chief executive of the Association of Convenience Stores, said opinion would be divided: “Some retailers will welcome this news, others will be concerned about competing with stores supplied through the merged Booker and Tesco business, and some will be uneasy at the prospect of working in partnership with one of their biggest historical competitors.”
Pointing to Amazon, which is pushing into food, Wilson chimed in: “If you look around the world, you see that the food industry is changing.” The ambitious plan was not met with universal enthusiasm by Tesco directors. Lewis admitted that Richard Cousins, the boss of catering group Compass who abruptly quit as Tesco’s senior independent director earlier this month, had resigned over the deal, which took a year to negotiate.
Tesco and Booker expect synergies from the deal to reach at least £200m a year by the third year after completion, with a boost of at least £25m to operating profit and cost savings of at least £175m. Cousins told the Financial Times he was “very much against the deal”. He added: “Tesco is in the middle of a price war that could last for years. They need to make the business simpler, not more complex.”
Wilson ruled out large-scale job losses, arguing that the savings will come from greater efficiency and procurement. He was confident that Booker’s convenience store brand names Londis, Budgens, Premier and Family Shopper would remain. Lewis said the board had a “good debate” over the merits of the deal which was “good governance”. He said that the rest of the Tesco board had backed the tie-up.
Some analysts suggested Lewis was biting off more than he could chew. Since taking the reins in 2014, he has been restructuring Tesco following the accounting scandal and turning around the performance of its core UK supermarkets. Earlier this month, the grocer unveiled a strong Christmas performance.
John Colley, a professor of practice at Warwick Business School, said Cousins’ departure was significant: “Compass has stuck to what it knows very successfully and shunned diversification as their shareholders will agree. Tesco seems to be chasing distractions before the job is finished in the supermarket grocery business.”
Tesco shares closed up 9% at 206p, while Booker shares leapt 16% to 213.4p. Tesco’s shares were also boosted by its promise to resume dividend payments in the 2017-18 financial year.
Wilson ruled out large-scale job losses, arguing that the savings would come from greater efficiency and procurement. He was confident that Booker’s brand names Londis, Budgens, Premier and Family Shopper would remain.
Under the terms of the deal, each Booker shareholder will receive 0.861 Tesco shares and 42.6p in cash, worth 205.3p a share. Booker shareholders will own 16% of the combined business.Under the terms of the deal, each Booker shareholder will receive 0.861 Tesco shares and 42.6p in cash, worth 205.3p a share. Booker shareholders will own 16% of the combined business.
The deal has been recommended by both boards, but needs approval from regulators and both sets of shareholders.The deal has been recommended by both boards, but needs approval from regulators and both sets of shareholders.
Retail analysts at Shore Capital said: “The initial gut reaction, which is usually the best one, is that it may be sound for Tesco but far from compelling for Booker shareholders.” But they cautioned: “Tesco is not a business without a lot to do fixing the UK stores, trying to make online sustainably profitable, rebuilding profitability in central Europe and generally deleveraging. As such, whether or not the integration of Booker is an ideal strategic step is subject to debate to our minds.” “The initial gut reaction, which is usually the best one, is that it may be sound for Tesco but far from compelling for Booker shareholders,” said Shore Capital analyst Clive Black.
Analysts believe the deal could run into competition problems, but Lewis was not concerned, pointing to Booker’s franchise model, whereby stores are owned independently by the retailer. “Tesco is not a business without a lot to do fixing the UK stores, trying to make online sustainably profitable, rebuilding profitability in central Europe and generally deleveraging. Whether or not the integration of Booker is an ideal strategic step is subject to debate to our minds.”
Retail specialist Nick Bubb said: “Our instant reaction is that the Competition and Markets Authority will have a field day with this, as although Tesco is mainly a retailer in the UK and Booker a wholesaler, Tesco does own the One Stop convenience store chain that competes with Booker’s interest in symbol groups and convenience store retailing (via Premier and Londis etc), so it is by no means clear that the CMA will allow things to proceed very far without having a good look at the overlap.” Black added that the non-Booker independent and wholesale trade would be “up in arms” at this proposed merger. “So it could be a very messy process,” he said.
Shore Capital concurred, adding: “The non-Booker independent and wholesale trade will be up in arms on this proposed merger and so it could be a very messy process.”
Booker supplies food to 450,000 caterers, 120,000 retailers and 700,000 small businesses including Wagamama, Rick Stein and Carluccio’s.