The Competition and Markets Authority confirmed on Tuesday that it had provisionally cleared the FTSE 100 food retailer’s £3.7bn takeover of wholesale group Booker, removing one of the largest obstacles to the completion of the deal.
Tesco’s shares jumped more than 5% on the back of the news and were trading as high as £1.87 per share.
Up until this point, the Tesco/Booker deal has encountered many bumps in the road, including pushback from some of its largest shareholders, Schroders and Artisan Partners.
Schroders currently owns 4.99% of the UK’s largest supermarket chain, making it the third largest shareholder after Blackrock, which owns 6.65%, and Norges Bank, which has a 5.96% stake.
Months after the proposed takeover was announced, Nick Kirrage, co-head of the Schroders global value team and manager of the Schroder UK Income fund, penned a letter to chairman John Allan, highlighting that the deal was not a good value proposition.
“Tesco is paying over 23 times this peak operating profit, a multiple which will make the creation of shareholder value extremely challenging,” he said at the time.
Laith Khalaf, senior analyst at Hargreaves Lansdown, agreed that “the fly in the ointment could yet be Tesco shareholders”.
“It remains to be seen if there’s a silent majority out there who will give the deal the nod, or whether the vocal critics of the proposals are reflective of wider discontent among the ranks of Tesco investors.”
Direct peers of Booker have also railed against the proposed merger, arguing that the alliance would give the firm more leverage to negotiate better terms from a number of suppliers, giving it an unfair advantage.
The CMA provisionally concluded this was a likely outcome from the Tesco/Booker union but added that this would translate to increased competition and reduced prices, providing some much-needed relief to the encumbered consumer in a higher inflationary environment.
In a statement to shareholders on Tuesday, Tesco said it “welcomes the announcement from the CMA” and looks forward to “creating the UK’s leading food business, bringing together our combined expertise in retail and wholesale.”
“This merger has always been about growth, and will bring benefits for independent retailers, caterers, small businesses, suppliers, consumers, and colleagues,” the retailer stated.
With the retail sector enduring harsher pressure from low-cost competitors like Lidl and Aldi, it is no wonder why traditional players like Tesco, Sainsbury’s and Morrisons have all turned to M&A, said Graham Spooner, The Share Centre investment research analyst.
“What’s interesting is that the announcement came on the same day as Kantar’s figures on market share. It appears competition is as rife as ever as a result of discounters Lidl and Aldi and as Tesco’s market share continues to fall, now at a level of 28%.
“Tesco will be hoping that its sheer size and buying power will help it fend off others in the sector and restore it as the nation’s favourite supermarket,” he added, noting “the jury is likely to still be out for some time on that”.
Khalaf agreed that there is a “concern is that Tesco is trying to run before it can walk, and that a big merger like this could blow its nascent recovery off course”.
In the short term, CEO Dave Lewis’ “hand has been strengthened by a healthy set of results” and the resumption of its dividend. “That may well be enough to get the shareholder base on board with the deal,” said Khalaf.
On the day at least, the “deal gets a thumbs up from the market at large”, he added.
