Tesco booker merge

Calls from two high profile Tesco investors for the supermarket to end its pursuit of Booker have been dismissed by City analysts, who suggest convincing Booker shareholders of the merits of the deal could be more of an obstacle.

This week it emerged fund managers Schroders and Artisan, representing about 9% of Tesco shares, wrote a letter to the Tesco board calling for it to pull out of the £3.7bn Booker deal that would “destroy value” and distract from efforts to continue the turnaround of the business.

The pair called for other investors to speak up against the transaction, but Tesco CEO Dave Lewis claimed most major shareholders remained supportive and the majority most of its biggest investors hadincreased their stakes since the announcement of the deal.

Schroders and Artisan would need to convince 50% of shareholders to vote against the deal to block it, and City analysts predicted there would be no groundswell of opinion against the bid.

Bernstein analyst Bruno Monteyne said: “Economic rationale for this deal is too strong to forego this opportunity. The majority of shareholders we talk to support current CEO Dave Lewis and this deal.”

He added: “Most of the pushback we have gotten to date for this deal came from Booker shareholders who found the price paid by Tesco too low.”

The deal needs approval from 75% of Booker investors to progress, meaning they have more power to push for renegotiation or block the deal than their Tesco counterparts.

Tesco is paying a 23 times operating profit multiple for Booker, but the wholesaler is continuing to rapidly grow sales (see City News, right) and profitability is likely to continue to increase.

Charles Hall, head of research at Peel Hunt, agreed: “Booker is performing very well so right now you could argue Tesco is underpaying given the Booker cash generation”.

He also suggested the relatively modest 12% bid premium meant Booker shareholders were just as reliant as Tesco investors on receiving future benefits from the merged business.

Booker’s shareholder register may have changed since the announcement of the deal in late January, according to Shore Capital’s Clive Black. Black suggested long-term Booker investors were not convinced of the long-term benefits of the tie up, commenting: “We sense that many long-standing Booker investors have expressed their view by taking advantage of the stock mark-up following the merger announcement and ending their association with the company.”

However, HSBC’s Dave McCarthy expects gross synergies to be a £500m rather than the £200m expected by management.

He added: “In our experience most Tesco shareholders remain very positive on the deal. Tesco and Booker represent the combination of two outstanding management teams and two outstanding businesses.”