Tesco PLC's (LON:TSCO) agreed bid for Booker PLC (LON:BOK) raises two questions: Is it paying enough? Will the regulators object?
The market certainly likes the deal, with shares in Booker up 15.1% to 210.7p while Tesco's shares hardened 9.5% to 207p.
“The combined group will be a powerful combination, given improved buying power and reach in retail and food service, and giving opportunities to improve distribution efficiencies and customer service,” declared broker Peel Hunt, pretty much echoing the Tesco/Booker party line.
The broker says a significant lump of the £200mln in synergies is likely to come from suppliers.
Answering the first question – is it paying enough? - Peel Hunt thinks not.
“We believe the deal to be skinny for Booker shareholders, given the limited premium and the relatively small percentage that Booker shareholders will have of the combined group. This is likely to encourage others to look at Booker,” Peel Hunt suggested.
Those rivals might have a better shot at getting a takeover past the watchful eye of the Competition and Markets Authority (CMA), which, in the words of Peel Hunt “will inevitably crawl all over the deal, particularly given the greater share in the convenience market”.
“However, we believe the deal is likely to pass given that it should be seen as positive for the combined group’s customers,” Peel Hunt said, answering the second question.
Laith Khalaf at Hargreaves Lansdown is also sanguine about the prospects of the CMA getting involved.
“The deal will inevitably lead to questions over the hegemony of Tesco’s presence in the high street, seeing as the deal means it will control Londis, Budgens and Premier brands, though these are effectively badges which are franchised to independent retailers, so the competition authority may not raise an eyebrow.”