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Not an entirely clear aisle for Tesco's Booker deal

As news of the forthcoming tie-up sinks in, what's in it for the latter's shareholders?
February 2, 2017

So who saw that one coming? Wholesaler Booker (BOK) and Britain's largest supermarket chain, Tesco (TSCO), have announced a £3.7bn megamerger, with the grocer offering Booker shareholders a cash-and-shares offer amounting to 205p a share, roughly a 12 per cent premium to the last recorded closing price before the news. By way of reaction, both share prices have spiked, with Booker's immediately trading at 212p, but falling back later.

IC TIP: Hold at 203p

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 earn a place on the new board, but Tesco seems to be the real winner here. The recovering supermarket chain claimed it would reap efficiency benefits - around £200m worth annually three years after the deal - thanks to Booker's supply chain and is likely to become more cash-generative, too.

There are also concerns that the Competition and Markets Authority will have a field day with this. Tesco already has a 28 per cent share of the UK grocery market - the largest compared with its rivals - and the Booker deal will significantly extend its foothold in convenience shopping. Some analysts are convinced disposals will be necessary to satisfy regulators - although this could, in turn, present further acquisition opportunities for other grocery chains looking to extend their property portfolios. What's more, the Tesco recovery plan is far from complete, with analysts at Shore Capital sceptical about the fact that neither group has, in recent memory, expressed an interest in either the wholesale or traditional supermarket retail worlds.

Shore Capital has also drawn a link between the sudden resignation of Richard Cousins, a Tesco senior independent director, last December and the deal news. They speculate it means there was not unanimous board support for this deal and believe Mr Cousins' departure is a blow to the grocery giant given his experience and capabilities in food and beverages.