Tesco’s takeover runs into trouble

Top shareholders won’t back deal for Booker cash and carry chain

LEADING shareholders in have called on Tesco bosses to abandon a £3.7bn merger with wholesaler Booker.

Fund giant Schroders, the grocer’s third biggest shareholder, and US asset manager Artisan Partners have both delivered a stinging rebuke about the potential deal.

According to Schroders, the high price being paid for Booker will destroy value for Tesco shareholders – and it wants others to speak out.

It is not the first time Tesco has come up against opposition for the mega-deal, which would create a food distribution giant responsible for £53.2bn of annual sales. Weeks before the deal was announced, the grocer’s nonexecutive director Richard Cousins surprisingly resigned.

At the time little explanation was offered, but it was later revealed Cousins, who is chief executive of food group Compass, was opposed to the merger. He was seen as key in helping the firm trim down the bloated business. But after discovering that Tesco chief executive Dave Lewis wanted to spend billions expanding again, he quit the board.

Now, in the latest attack, Schroders has written a letter – seen by the Daily Mail – to Tesco chairman John Allen urging him to pull out of the merger.

‘All management teams believe that their acquisitions will create value,’ it said. ‘However, there is compelling academic and empirical evidence that, on average, acquisitions destroy value for acquiring shareholders.

‘The high price being paid for Booker makes the destruction of value even more likely [than in an average deal].’

Tesco also said it had agreement from the whole board, however Nick Kirrage, Schroders’ fund manager, pointed towards Cousins’ departure, and said: ‘Clearly it didn’t. We can imagine how difficult it was for Cousins to resign, surrounded by very senior peers. We would give Richard a huge amount of credit for letting his conscience be his guide.

‘Tesco is paying an incredibly high price for the acquisition. History suggests the majority of all acquisitions that go ahead, despite all the optimism, fail to create value for the business. Paying 23 times the peak profit of Booker is too high a price.’

In the merger the firms say that with more buying power, they will be able to get better prices for their customers.

But it will push Tesco back into the restaurant market, just after the supermarket giant sold the Giraffe restaurant chain and the Euphorium bakery business.

Daniel O’Keefe, who manages Artisan’s global value funds, told the Financial Times: ‘The company basically imploded before Dave Lewis began a journey of simplifying, refocusing on the UK.

‘We just don’t understand, in a business as fragile as retail, why on earth would we risk distracting ourselves from that huge goal.’

The broadside by Schroders and Artisan Partners makes the Tesco and Booker deal the latest takeover bid to be put under scrutiny. Tomorrow the £21bn German takeover of the London Stock Exchange by the Deutsche Boerse is likely to collapse.

Last night Tesco did not respond to requests for comment.