Tesco wins provisional approval for wholesaler Booker takeover

LONDON — Tesco won provisional approval for its 3.7-billion pound ($4.9-billion) takeover of wholesaler Booker from the UK competition regulator on Tuesday, moving Britain’s biggest retailer closer to securing a new avenue of growth.

The Competition and Markets Authority (CMA) said it had conducted an in- depth review and provisionally concluded that Tesco’s purchase of Booker does not raise competition concerns.

Tesco’s move on Booker in January sparked further consolidation in Britain’s 185-billion pound grocery market as supermarkets seek additional sources of growth.

Analysts expect more M& A activity as supermarkets seek to utilize excess capacity within their supply chains.

“The wholesale trade in particular will be wondering why on earth it ever bothered engaging at all with the CMA, an organization that seemingly lives in a different universe,” said Shore Capital analyst Clive Black.

“If Tesco and Booker can merge with unconditional approval, then the scope for further large-scale consolidation cannot be ruled out,” he said.

The provisional clearance will come as a big relief to Tesco. Most analysts had expected it would have to agree to store divestments or restrictions on operations to gain clearance.

Tesco and Booker have argued their deal will enhance competition in Britain and promote consumer interests. However, rival wholesalers, including Bestway, Spar, Bidfood and Sugro, reject that and have called for the deal to be blocked.

UNSHAKEABLE GRIP

They believe if the deal proceeds Tesco will have an unshakeable grip on the procurement of all grocery categories in Britain and that suppliers will find it even harder to resist Tesco’s demands.

Both Tesco and Booker, the country’s biggest grocery wholesaler, welcomed the CMA announcement. Tesco said it expected to complete the deal, which also requires shareholder approvals, in early 2018.

Shares in Tesco and Booker were both up 7% at 1422 GMT.

Rival grocers declined to comment on the record. But a source at one grocer described the CMA’s decision as “ridiculous.”

Though it is unusual for provisional findings to be reversed, rival wholesale and retail groups do have the chance to present further evidence and comment before the CMA’s final ruling due in December.

In consolidation moves already prompted by the deal, Sainsbury’s, Britain’s no. 2 supermarket group, considered a bid for the Nisa convenience chain before the Co- operative Group secured a 138-million pound deal. Morrisons, the no. 4, has signed a wholesale supply deal with the McColl’s chain.

Some Tesco shareholders have criticized the Booker bid, saying Chief Executive Dave Lewis is overpaying and that it will distract from the company’s turnaround plan.

CALLS FOR HIGHER PRICE?

The approval could spur calls from Booker shareholders for Tesco to raise its bid.

One top 20 Booker investor said he believed Tesco should pay more “as Booker is Tesco’s last hope.” He said the investor would reiterate to Booker that it could extract a higher price.

Bernstein analysts said they expect some uncertainty to remain, with the focus shifting to whether investors will approve the deal.

Their analysis indicates that Tesco will achieve the required 50% shareholder approval and that the focus will be on Booker, where the threshold is 75%.

“With a higher shareholder hurdle and the Tesco share price below the level when the bid was made, Booker shareholders may argue for a higher share price,” the broker’s analysts said.

The Booker deal is Lewis’s boldest move yet, giving Tesco access to the faster growing “out of home” food market.

For each Booker share, Tesco is offering 0.861 new Tesco shares and 42.6 pence in cash.

The CMA said it found that Tesco as a retailer and Booker as a wholesaler supplying caterers and independent retailers Premier, Londis, Budgens and Family Shopper do not compete head-tohead in most of their activities.

In particular, it found that Tesco does not supply the catering sector that accounts for more than 30% of Booker’s sales.

“Our investigation has found that existing competition is sufficiently strong in both the wholesale and retail grocery sectors to ensure that the merger between Tesco and Booker will not lead to higher prices or a reduced service for supermarket and convenience shoppers,” said Simon Polito, chair of the CMA’s inquiry group. •