PA ANALYSIS: Is the Tesco/Booker deal a look at the future of food?

Presenting the proposed merger of food retailer Tesco and wholesaler Booker, Tesco CEO, David Lewis said the combined group would “delight” customers.

PA ANALYSIS: Is the Tesco/Booker deal a look at the future of food?

|

While that might be a stretch, the surprise deal certainly seemed to go down well with shareholders; Tesco shares were almost 10% higher on the day, while Booker stock rose over 16%.

And, there are a number of reasons why that would have been the case.

For some it could have been as simple as the emergence, finally, of a ‘good’ Tesco news story. As IG chief market analyst, Chris Beauchamp, put it, the deal proves that Tesco remains the “sector titan before which all others pale in comparison” and, he added, could well be “just the kind of news to finally reverse the serial underperformance in Tesco shares”.

For others, it was the numbers that were compelling.

This is sector consolidation in an unexpected but powerful way, said Bernstein analyst Bruno Monteyne.

Monteyne, who has an outperform rating on Tesco stock said the merger would give the combined group access to a much larger market opportunity: £110bn for ‘in home’ and £85m for ‘out of home’ food. While at the same time providing very material cost savings.

The key variable at this stage, he said is how conservative synergy estimates are at this stage. “Our first quick estimates suggest synergy potential of around £325m from Booker sourcing synergies, supply chain efficiencies, joint buying of ‘goods not for resale’ and higher revenue synergies.”  

Simon Murphy, manager of the Old Mutual UK Equity Fund, who owns stock in both firms said he was very excited about the deal, pointing out that, in respect of Booker, the announced synergies of at least £200m per annum exceed the entire profits of the company in 2016.

“From a Tesco perspective, the addition of 5,800 independent convenience shops creates a network of 8,000 collection points from which consumers can access Tesco banking, mobile and payment services,” he said, adding that this is just one of a number of areas in which Tesco could leverage the deal.

 

MORE ARTICLES ON