The Competition and Markets Authority said its in-depth investigation into the proposed merger had raised no competition concerns.
The news sent shares in Tesco up 7.29% to 189.90p and Booker up 7.45% to 213.30p in afternoon trading.
“Millions of people use their local supermarket or convenience store to buy their groceries or essentials. Strong competition in the market ensures that shoppers can choose the best deal for them,” said Simon Polito, chair of the inquiry group.
“Our investigation has found that existing competition is sufficiently strong in both the wholesale and retail grocery sectors to ensure that the merger between Tesco and Booker will not lead to higher prices or a reduced service for supermarket and convenience shoppers.”
The regulator had announced in January that it was referring the proposed merger for an in-depth investigation on concerns it could result in higher prices for shoppers in more than 350 areas where there is an overlap between Tesco’s supermarkets and Booker-supplied “symbol” convenience store chains, including Londis and Budgens.
It had raised worries that there could be a potential for Booker to reduce the wholesale services or terms it offers the stores it currently supplies, in order to drive customers to their local Tesco.
Booker supplies more than 5,000 stores under the Premier, Londis, Budgens and Family Shopper brands in the UK while Tesco has more than 3,000 stores.
CMA prepares final report
The CMA considered the impact of the merger in every local area where a Tesco and a Booker-supplied shop were both present, totalling more than 12,000 shops.It found there was sufficient competition in both the wholesale and retail markets, meaning the merger would not result in higher prices or reduced services.
In a statement following the CMA’s provisional clearance, Tesco said: “We look forward to creating the UK's leading food business, bringing together our combined expertise in retail and wholesale. This merger has always been about growth, and will bring benefits for independent retailers, caterers, small businesses, suppliers, consumers, and colleagues.”
Tesco said it will continue to work with the CMA as it prepares its final report due at the end of December. The supermarket expects the merger to be completed in early 2018.
Hurdles remain with disapproval from major investors
"Tesco has cleared a major hurdle in its proposed merger with Booker, though the competition regulator can expect a postbag full of angry letters from convenience shop owners before it comes to a final decision next month," said Laith Khalaf, senior anlayst at Hargreaves Lansdown.
"The fly in the ointment could yet be Tesco shareholders, with some influential players still not backing the merger. It remains to be seen if there’s a silent majority out there who will give the deal the nod, or whether the vocal critics of the proposals are reflective of wider discontent amongst the ranks of Tesco investors."
Daniel O’Keefe, of hedge fund Artisan Partners, and City investment firm Schroders have spoken out against the merger, saying it could impede on the grocer’s turnaround. Earlier this year, they both wrote to Tesco chairman John Allan, urging him to scrap the proposed takeover.
Tesco has argued that the tie-up would generate cost synergies of £200mln a year and boost earnings and revenues.
But AJ Bell investment director Russ Mould believes investors reserve the right to remain sceptical.
"Tesco and Booker operate in mature markets and there is therefore a suspicion that the idea is to create growth where little exists, while the vast majority of merger and acquisition (M&A) deals fail to deliver the targeted revenue or cost benefits," he said.
"Tesco’s poor handling of Giraffe and Dobbie’s Garden Centres raises further questions here, although that was under a different management team, while Booker’s handling of its 2012 purchase of Makro (wholesale business) was exemplary."