The UK's Largest Food Group !!!1 Mar 2018 11:39
When Tesco made a �3.7 billion swoop for cash-and-carry chain Booker last January it marked perhaps the biggest change in strategy since Jack Cohen set up his Hackney market stall in 1919.
For the first time, Tesco would go from serving the public in High Street shops and out-of-town hypermarkets to providing groceries to trade buyers � corner shops, restaurants, pubs and bars. Within months, deal frenzy had gripped rivals including Morrisons, Sainsbury�s and the Co-op.
Today, investors gave their final nod in favour of the takeover at Tesco�s AGM on Aldersgate in the City. Booker's approval followed shortly.
Despite some disquiet from investors including activist Sandell, Schroders and Artisan, the two boards have worked hard to convince investors the deal makes sense. Here�s how:
Wholesale change
A key reason for the deal was to improve Tesco�s access to the chain restaurants market in which Booker, led by Charles Wilson, has enjoyed strong growth as a supplier. The merger benefits Tesco by making it a major supplier to 117,000 corner shops, including Premier and Londis, plus farm shops and delicatessens, as well as 440,000 restaurants and pubs from Carluccio�s and Wagamama to Michelin-starred venues.
The deal also means Booker�s clients can benefit from Tesco�s food innovations such as gluten-free ranges, and its recently launched Wicked Kitchen vegan meals.
From debts to dividends
Tesco chief Dave Lewis has done much in his three years of repairing the business whose financial scandal he discovered when he arrived.
Part of that included selling businesses to cope with its mountain of debt. While he made a start, the company remains heavily indebted, an issue which has held back dividends to shareholders.
Booker, on the other hand, is hugely cash positive, so combining the two should ease Tesco�s financial crunch. Analysts at Redburn say the ratio of Tesco�s profits to its debt will fall from its stratospheric 5.2x today to 4.6x. Still high, but far more comfortable.
Not only that, but Tesco�s pension deficit will benefit from cash-generative Booker, as the deficit will be backed by a bigger stream of earnings.
Redburn is not in general a fan of the deal, citing botched Tesco takeovers in the past, but even it has to admit this is a big benefit.
The enlarged group will boast revenues of nearly �60 billion. Wilson says the company intends to be �capital disciplined� post-merger, mostly using existing space and resources to grow, rather than borrowing to invest.
Estimated cost savings and benefits of �200 million are also expected. �The cashflow that Booker brings, plus the synergies that they will extract in time, will help Tesco reduce its debt more quickly and gives it a stronger capability to pay larger dividends over time,� says Shore Capital�s Clive Black.
Buy
Sign In
Follow the stocks
