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Time to bank some Booker profits

As the wholesaler announces a recommended merger with Tesco, it might be time to finally take some profits on this long-standing buy tip.
January 27, 2017

Wow. Who saw that one coming? Wholesaler Booker (BOK) and Britain's largest supermarket chain Tesco (TSCO) have announced a £3.7bn mega-merger, with the grocer offering Booker shareholders 205p a share, roughly a 12 per cent premium to the last recorded closing price prior to the news. By way of reaction, both share prices have spiked, and Booker's is now trading above the offer price at 212p at last look.

IC TIP: Hold at 212p

But analysts seem unconvinced about what's in it for Booker's shareholders in the long term. They should own around 16 per cent of the enlarged entity, and chief executive Charles Wilson will have a place on the new board, but Tesco's the real winner here. The recovering supermarket chain will reap serious efficiency benefits - around £200m worth a year three years after the deal - thanks to Booker's supply chain and is likely to be more cash-generative, too.

There are also concerns the Competition and Markets Authority will have a field day with this. Tesco already has a 28 per cent share of the British grocery market - the largest compared with its rivals - and the Booker deal will significantly extend its presence across the convenience end of the market. Some analysts are convinced disposals will be absolutely necessary to satisfy regulators. What's more, the Tesco recovery plan is far from complete, although Booker's reputation for solid margin performance may help on this front.