UK-based food retailer, Tesco, has agreed to acquire the UK’s largest food wholesaler, Booker Group, in a £3.7 billion (US$4.6 billion) deal that would create a food supply chain giant.
Under the terms of the deal, which has been under negotiation for a year, the two groups will combine in a share and cash deal that values Booker at £3.7 billion (US$4.6 billion) at a purchase rate of 205.3 pence per share, representing a 12 percent premium over Booker’s closing price on January 26, 2017. Further terms include each Booker shareholder receiving 0.861 Tesco shares and 42.6p in cash, representing approximately 16 percent of the merged group, reports The Business Magazine. Additionally, Charlie Wilson, chief executive of Booker Group, will join both the board and the executive committee of the combined group.
“Tesco has made significant progress in turning around our UK retail business,” said Tesco Chief Executive Dave Lewis. “This merger with Booker will further enhance Tesco’s growth prospects by creating the UK’s leading food business with combined expertise in retail, wholesale, supply chain and digital. Wherever food is prepared and eaten – ‘in home’ or ‘out of home’ – we will meet this opportunity with the widest choice and best service available.”
Booker’s major presence is in supplying branded and private-label foods to independent convenience stores, grocery retail stores, restaurants, and leisure outlets. It supplies a portfolio of thousands of products to more than 1.3 million customers including the prison system in England and Wales, and multiple restaurant, pub, and cinema chains across the UK. The group also owns the Family Shopper, Londis and Budgens names under which the group holds franchise agreements with nearly 1,700 stores and more than 3,200 Premium branded stores, according to the BBC.
“It’s a very complementary coming together of capabilities,” said Lewis. “What we are doing is following the customer. The market is evolving.”
Last year Booker saw sales of £5 billion (US$6.3 billion) and pre-tax profits of £150 million (US$188.6 million) and the deal is expected to add approximately £3 billion to Tesco’s £15.5 billion market capitalization. Further, if the deal is approved and moves forward, Tesco expects the acquisition to generate £200 million (US$251.5 million) in annual profits within three years – of which, the Financial Times reports that more than half will be generated from procurement savings.
“This is part of a wider trend for grocers and retailers more generally to seek growth through large mergers and acquisitions rather than through organic store-by-store or smaller acquisitions,” Tim Vallance, head of JLL UK, told The Business Magazine.
Echo of a Deal
This deal between Tesco and Booker is the latest proposed large-scale consolidation in the busy food distribution space.
In late 2013, U.S. food distribution giant, Sysco, agreed to buy its rival, US Foods in a $3.5 billion cash and stock deal. If it had gained regulatory approval, the merger would have been valued at $8.2 billion; would have brought Sysco’s sales from $44 billion to $65 billion per year, and would have given shareholders in US Foods approximately 13% of the new company.
It wasn’t to be, however. In early 2015, The U.S. Federal Trade Commission (FTC) filed a lawsuit to block the merging of the two largest food distribution companies in the country, claiming that the deal would eliminate competition within the market, and would create higher prices for customers that would need to order all food and supplies from a single distributor. In an attempt to alleviate the FTC’s concerns, Sysco and US Foods offered to sell 11 distribution centers with sales of $5 billion, creating a new independent business, Performance Food Group, in order to maintain competition within the industry. However, the FTC rejected the offer as inadequate.
One year later, in early 2016, Sysco looked overseas, and agreed to acquire the European food distributor, Brakes Group from Bain Capital Private Equity in a deal worth $3.1 billion that included the repayment of approximately $2.3 billion of Brakes Group’s debt.
As planned, the Sysco-Brakes Group deal closed in July 2016, creating a combined company with annualized sales of $55 billion.
Despite the success of the Brakes Group acquisition, there remains unease about the proposed Tesco-Booker deal.
“Clearly, there are competition issues,” an anonymous source with connections in the industry told the Financial Times. “I can’t imagine any supplier calling for an inquiry, [but] if you are a supplier to Booker but not to Tesco and you knew that your competitor had a good relationship with Tesco, you’d be nervous about this consolidation.”
-Lynda Kiernan
Lynda Kiernan is Editor with GAI Media and daily contributor to GAI News. If you would like to submit a contribution for consideration please contact Ms. Kiernan at lkiernan@globalaginvesting.com