Tesco PLC (LON:TSCO) has got its mojo back, launching a £3.7bn bid for wholesaler and convenience stores giant Booker Group PLC (LON:BOK).
Does this signal an end to the dark days for Tesco and is it time for you to pop the shares in your basket?
Or will there be an unexpected item in Tesco's bagging area?
Five reasons to consider buying Tesco
Expansion is back on the agenda
After coming in and sorting out the mess left by the overly ambitious/megalomaniac (delete as appropriate) previous management, Tesco boss “Drastic” Dave Lewis is in the mood to flex the company's muscles.
It's usually a toss-up whether takeovers create value or destroy it, but at least Tesco is not repeating its mistake of expanding overseas (well, apart from the fact Booker has interests in India).
British retailers succeed overseas about as often as the England national football team.
It's also not repeating the mistake of acquiring lots of gargantuan edge of town retail sites that fewer people want to visit in this internet shopping age.
Booker's Londis and Budgens convenience stores will fit in very well with the “little and often” top-up shopping style of the current day.
The stores are all franchised, so the theory is that as Tesco won't own the stores, there will not be any problems with the Competition and Markets Authority.
Receding debt problems
In the crazy years of scatter-gun expansion – Fresh & Easy, Giraffe, Harris + Hoole - the Tesco balance sheet got seriously strained.
Drastic Dave quickly set about tackling that, selling off extraneous parts of the business and returning the company to what it does best: crushing the life out of its competitors and suppliers.
(Removes tongue from cheek and awaits emails from fans of Aldi and Lidl).
At the time of the interim results in early October, net debt was still an eye-watering £4.4bn, but that was half the level of a year earlier, and down 15% over the half-year period.
The offer for Booker will entail splashing out some cash, but not the full £3.7bn at which the terms value Booker, because a large chunk of the consideration will be paid in shares.
There is a “mix and match” facility that enables shareholders to take less or more in cash, so we do not know exactly how much cash Tesco will end up paying out.
What we do know is it is seeking to acquire a business that is awash with cash.
Booker puts the “cash” in “cash and carry”; back in September it said it had £105.7mln in cash, and though it plans to hand a pile of cash back to shareholders in July of this year, it is clearly a cash generating machine.
That cash will help service any additional debt Tesco takes on.
Did someone mention divis?
Tucked away in the bid statement was an announcement about the resumption of dividend payments by Tesco in the next financial year (which runs to February).
The retailer will start off small but intends to grow the dividend until it is about half of post-tax earnings.
Broker forecasts suggest Tesco's earnings per share next year will be 9.92p, so although it won't jump straight to paying half of that out (4.96p), if it did, it would be yielding 2.4%.
That's the succession sorted
Much as the journalistic community would mourn the departure of a boss with the nickname “Drastic Dave”, Booker's chief executive Charles Wilson is highly rated by the City.
He'll be joining the Tesco board and the executive committee, and some have already suggested he could be the next boss of Tesco.
Not for a while, one assumes, giving we journalists plenty of time to come up with a snappy nickname.
Let's hope it's not “Chop & change Charlie”.
We can get it for you wholesale
“By bringing together Tesco and Booker's retail and wholesale expertise, supply chain and digital capabilities, the combined group will be able to provide greater choice, quality, price and service in the food market, whilst improving efficiency and reducing food waste,” Tesco's statement said.
I think that is the first time I have heard of “reducing food waste” as a compelling reason for a merger, though it is undoubtedly a good thing.
The merger, assuming it is cleared, would take Tesco into new areas, such as helping independent retailers and caterers.
Booker operates a cash-and-carry network and, through its 200 branches, has a delivery capability with national coverage.