Booker shareholders will receive 0.861 shares in Tesco and 42.6p for every share they hold. This values the company at 205.3p, a 12% premium to the previous close and 24% premium to the average share price for the past three months.
Booker is primarily a food wholesaler, selling to food retailers as well as catering and small businesses. The company has grown under the guidance of CEO Charles Wilson from a £0.4bn market capitalisation in 2007 to £3.7bn today.
The wholesale market that Booker operates in is distinctly different to the retail market of Tesco, however there are obvious similarities and synergies to be exploited. The merger is estimated to create £200m of synergies for the combined company. It will also reduce Tesco’s overall financial leverage due to Booker’s net cash position and may boost Tesco’s overall growth due to the higher growth business of Booker.
The food retail sector remains highly competitive. Tesco has focussed on its core business, selling its non-core businesses such as Giraffe, Blinkbox and exiting overseas operations. The merger seems to contradict this emphasis on the core business; particularly since Tesco has suggested there is a large amount of self-help it can implement, targeting ambitious margin improvement over the next three years. It is too soon to say whether such a merger will deliver value to shareholders but it is clear, with this deal and Sainsbury’s purchase of Argos last year in mind, that the main supermarkets are looking to take a different approach to improve returns.
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