Tesco’s £3.7bn takeover of Booker could spark a bidding war as rivals attempt to muscle in on the deal, according to analysts in the City.
The 80/20 shares-and-cash offer looked to be better value for Tesco and a “skinny” deal for Booker shareholders, said broker Peel Hunt, which covers Booker.
“We believe the deal to be skinny for Booker shareholders, given the limited premium [12% to Booker closing share price] and the relatively small percentage that Booker shareholders will have of the combined group,” added head of research Charles Hall. “This is likely to encourage others to look at Booker. We suspect that Tesco will be keen to complete this deal, so there is every chance of a bid battle.”
However, analysts at Jefferies said the 20x EBITDA multiple was “a remarkable valuation” for a wholesale food distributor, but reflective of “great delivery” under the leadership of Charles Wilson.
Senior City sources speculated that Asda owner Walmart, Brakes owner Sysco and, even, Amazon could be tempted to outbid Tesco in attempt to stop the supermarket creating the UK’s leading food business with combined revenues of close to £60bn.
“The competition won’t like Tesco controlling retail and wholesale, so the likes of Brakes will likely view the move as quite aggressive,” the dealmaker said.
“Rivals certainly won’t be sitting around congratulating Tesco for its brilliant strategic play; they will view the move as very negative for them and may well decide they need to do something about it.
“However, Tesco’s firepower is such that they can make this into a good deal and offer more to Booker shareholders making it very difficult for a third party to come in with a higher price and put Tesco off – but it doesn’t mean someone won’t try.”
The City source added it would also be hard for a third party to make the deal attractive for Booker CEO Charles Wilson, whose 6.1% shareholding in Booker is worth about £220m at the offer price.
“Part of attraction for him is he quite likes the idea of converting his Booker stock to Tesco stock and also potentially running the supermarket in the future. Other shareholders might be less thrilled with the offer. A lot depends on performance of Tesco shares in next few months as that provides the background price for Booker. If it performs well then it’s a done deal, but if there is a wobble then maybe a few shareholders think twice.”
Tesco shares jumped 9.4% higher in early trading back to 206.7p as the deal was enthusiastically welcomed by the markets. The shares had previously slipped 8.6% backwards since the start of the year as enthusiasm over Tesco’s solid Christmas began to dissipate.
Booker shares soared 16.2% to 212.8p, given the premium Tesco is offering for Booker’s stock.
Booker shareholders will receive 0.861 new Tesco shares and 42.6p in cash per share, which made the deal worth £3.7bn and 205.3p per Booker share, based on the closing price of 189p per Tesco share on 26 January 2017 (the last business day before the date of the announcement). The value will rise and fall depending on the performance of Tesco’s share price.
It represented a premium of 12% to the Booker closing price of 183.1p a share and Booker shareholders will own 16% of the combined business after completion.
The deal is expected to lead to synergies of at least £200m a year – with a significant proportion is likely to come from suppliers, Hall at Peel Hunt said. Tesco claimed this would come from revenue synergies of at least £25m per annum, along with at least £175m from procurement and distribution savings.
And Tesco is finally reinstating its dividend – more than two years after the last payment – in the 2017/18 financial year, which is believed by analysts to be driven by Booker’s dividend policy for its shareholders.
“The combined group will be a powerful combination, given improved buying power and reach in retail and foodservice, and giving opportunities to improve distribution efficiencies and customer service,” Hall said.
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