Tesco plc (LON:TSCO) boss Dave Lewis has defended the supermarket's takeover of Booker Group after two of its largest shareholders requested the offer for the wholesaler be retracted.
Schroders and Artisan Partners have written to separately to Tesco’s chairman, John Allan, expressing their opposition to the deal.
The two shareholders, which own 9% of Tesco between them, argued the £3.7bn bid for Booker was too high and the merger would detract the company's focus away from its restructuring.
Regardless, Lewis said Tesco would continue to pursue the proposed merger and he has met a number of other shareholders in the UK and in North America who support the move.
"We’re absolutely, completely committed to the deal," Lewis told reporters today.
Tesco will need the backing of its shareholders to approve the acquisition of Booker, which owns the Budgens and Londis grocery chains, so the opposition from Schroders and Artisan marks a setback.
Schroders fund manager Nick Kirrage voiced his concerns about the deal to the BBC's Today programme, saying he believed Tesco was paying a premium for Booker.
"Booker is a business that has been doing extremely well, its profits have been growing very quickly and profit margins have been expanding rapidly," Kirrage said.
"Tesco have had to pay a premium and have made an assumption that profits are going to continue to grow in the future."
Daniel O’Keefe, a fund manager at Artisan Partners, told the Financial Times he also thought the bid was too generous. He added that the takeover was a distraction for Tesco during its overhaul of the business.
“Let’s say that things go really, really well, which they almost never do in acquisitions but just suppose,” O’Keefe said.
“Getting Tesco back to normal operating margins is worth maybe £11bn to shareholders. They’re putting that at risk to do a £3.7bn deal.”
Tesco has said the deal would unlock synergies of £200mln a year, with at least £25mln from revenues. The company argued the merger would improve efficiency, reduce procurement costs and cut food waste.
“This merger with Booker will further enhance Tesco's growth prospects by creating the UK's leading food business with combined expertise in retail, wholesale, supply chain and digital,” Lewis said when the proposed deal was announced.
Yet Lewis confessed the merger was the reason for the resignation of senior independent director Richard Cousins in early January.
Cousins, the boss of catering group Compass, left after expressing “a different view about” the takeover offer, Lewis said.
The deal is also likely to be scrutinised by the Competition and Markets Authority as it would lift Tesco’s share of the convenience market to about 28% from 17%, including franchisees, according to data from Euromonitor.
Neil Wilson, senior market analyst at ETX Capital, said Tesco has a big job on its hands with its takeover of Booker and agreed the bid was rather expensive.
“It does look pricey – the 24% premium paid for Booker scrubs the lion’s share of value from the deal,” he said.
“The big risk is that Tesco will take its eye off the ball and its turnaround will suffer for precious little by way of value. Hubristic takeover deals usually mark a market top – let’s hope it’s not one of those.”
Tesco's shares recovered 0.53% to 190.95p in afternoon trading following a decline earlier in the session.
-- Adds reaction from Tesco boss, updates share price --